I’ll try to be as clear as possible on this: If you make a pretty good living but also file a Schedule C that regularly loses money, the IRS has been told to come after you.
The Treasury Inspector General for Tax Administration (TIGTA) put out a report in mid-2016 saying that the IRS should turn its guns toward high-income individuals with money-losing Schedule C’s. The report concluded that of the money-losing Schedule C’s it reviewed, fully 88 percent “showed an indication that the Schedule C businesses were not engaged in for profit.”
The report, which has been written about in Forbes and by tax geek maven Paul L. Caron on his TaxProf blog, has a title which really tells you all you need to know: Opportunities Exist to Identify and Examine Individual Taxpayers Who Deduct Potential Hobby Losses to Offset Other Income.
OK, you’ve been warned. Here’s a link to the TIGTA press release, which you can use to connect to the report.