I know someone that works for the IRS and he told me about some of the systems they have in place that triggers anyone’s tax return for further inspection.
First, Every self employed person should file a profit/loss statement, because every business incurs expenses that need to be itemized (cost of goods sold, supplies, rent, etc.). Claiming the standard deduction instead of itemizing your business expenses probably triggered your tax filing for further attention.
Second, You earned zero income as a self employed painter, then you should have filed zero income as a painter, and claimed your scrapping income as ‘scrap metal recycling’ in the Other Income category. This way, you can claim the standard deduction without arising any questions.
Third, The IRS can easily audit all banking records that are associated to your social security number or taxpayer ID. Most income has a paper trail (1099 or W-2) that can be verified. Claimed income that’s unverified will be compared to your total banking deposits for the year. If both amounts aren’t within a certain allowable percentage; it’ll trigger a flag for further inspection.
For example:
You claim $50,000 of unverified income, but your total bank deposits for the year are $80,000, and you don’t have a 1099 or w-2 to back up the difference; this should trigger an audit.
You should have your tax person file an amended 1040 & 540 to reflect your occupation as ‘unemployed’, and claim your income as ‘scrap metal recycling’ in the Other Income category.
Also, make sure your bank deposits don’t exceed your claimed income.
Hand written receipts are acceptable as long as it has the business info printed or rubber stamped.
Just remember that the IRS usually shows no mercy for poor record keeping.
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