Does this raise a red flag???

[bertrans]

Yes the IRS allows the job completion method as one way of reporting income. Just a caveat, however- even if using the job completion method, AMT requires using the percentage of completion method for AMT purposes if I am not mistaken.

Excellent point. Further, returning to the 'red flag ' issue: are we all agreed that such a return would be virtually shouting to the Service: 'Audit me, audit me -please!'? Regardless of the outcome.

[Luis Mopeo]

Excellent point. Further, returning to the 'red flag ' issue: are we all agreed that such a return would be virtually shouting to the Service: 'Audit me, audit me -please!'? Regardless of the outcome.

From what I've seen, a loss on one return isn't likely to trigger an event. I've never seen a one-year loss Schedule C loss audited. I've seen a bunch of three-consecutive-year Schedule C losses audited.

I've seen the same thing with big charitable contributions. I think three is the lucky number.

I'll prepare a loss return one year, maybe prepare a loss return two years, but when they come in the next year with that big loss, I bid them a fond farewell. I think I've avoided a ton of trouble that way. There are a couple of exceptions, a little digging reveals legitimate reasons. But when they shrug their shoulders and make some lame excuse that doesn't make sense, I get suspicious real fast.

[bertrans]

red flag

I agree with your point reagarding general IRS practise; however, the Service is cracking down on sole-proprietors big time. The 'Tax Gap'.

[Jiggers]

Losses, year after year

I'll prepare a loss return one year, maybe prepare a loss return two years, but when they come in the next year with that big loss, I bid them a fond farewell. I think I've avoided a ton of trouble that way. There are a couple of exceptions, a little digging reveals legitimate reasons. But when they shrug their shoulders and make some lame excuse that doesn't make sense, I get suspicious real fast.

I put one of the following statements in my "Filing Instructions" cover letter on suspect returns:
*** It should be noted that your Schedule C has consistently shown a loss. While this loss may be substantiated, it may cause this return to be audited by the IRS. You must be prepared to show that, even though you currently have losses, you have the intent on making a profit.

*** It should be noted that your Schedule E has consistently shown a loss. While this loss may be substantiated, it may cause this return to be audited by the IRS. You must be prepared to show that, even though you currently have losses, you have the intent on making a profit.

*** It should be noted that your Schedule F has consistently shown a loss. While this loss may be substantiated, it may cause this return to be audited by the IRS. You must be prepared to show that, even though you currently have losses, you have the intent on making a profit.

*** It should be noted that your Schedule F has consistently shown a loss. This has always been the result of having little or no sales while incurring high expenses. While this loss may be substantiated, it may cause this return to be audited by the IRS. You must be prepared to show that, even though you currently have losses, you have the intent on making a profit.

During one audit, the IRS auditor saw one of the above statements on the cover letter of the return that was being audited and commented that "...you can't say that you didn't warn him..."

[ChEAr$]

Let me get this straight, now

Losses for previous two years. hmmmmm...

Cost of Good sold section that exceeds gross income....hmmmm..

Ah, I know what. Just like buying widgets for 4$, and selling them for 3$;
doesn't look good, BUT... he'll make it up on volume!

[Luis Mopeo]

From what I've seen, a loss on one return isn't likely to trigger an event. I've never seen a one-year loss Schedule C loss audited. I've seen a bunch of three-consecutive-year Schedule C losses audited.

Red flag? Yes. Today's Tax Court shows a guy with a Schedule C who reported COGS in excess of revenue in 2001, 2002, 2003, and 2004. The return showed losses of $5,661, $15,232, $7,634, and $6,383 respectively.

I'll bet the IRS audited the return after the third year of losses, and picked up the 2004 return as a bonus.

http://www.ustaxcourt.gov/InOpTodays/Agbaniyaka.TCM.WPD.pdf