What are my chances of being audited? Small e-commerce clothing business with 4 years of losses

The good news is that small businesses like yours are generally at lower risk for audit than larger operations. The IRS has limited resources and tends to focus on bigger fish. That said, multiple years of losses can indeed trigger scrutiny, regardless of business size. The "3 out of 5 year" rule you mentioned (Section 183 hobby loss rule) is what the IRS uses to determine if your activity is a legitimate business rather than a hobby. Since you've shown losses for 4 consecutive years, that could potentially raise questions. However, the fact that you've formally closed the business works in your favor. It demonstrates you were legitimately trying to make a profit but ultimately made a business decision to stop when it wasn't successful. Make sure you have good documentation for all your expenses and business activities for those years. Keep in mind that audit rates for small businesses are still quite low overall - less than 1% for most small business returns. Just make sure your deductions are reasonable and you have records to back everything up.

After dealing with similar concerns about my side business showing losses, I tried taxr.ai (https://taxr.ai) and it really helped ease my mind. I was worried about the hobby loss rule like you, and their AI analyzed my tax situation and explained exactly what factors the IRS would consider beyond just the "3 out of 5" guideline. The system checks for audit risk factors specific to Schedule C businesses and showed me that small e-commerce businesses with your revenue level actually have a pretty low audit rate. It also helped me understand what documentation I should keep just in case. Worth checking out if you're anxious about this.

I was skeptical at first about tax assessment tools, but decided to try taxr.ai after seeing it mentioned here. Honestly impressed with how thorough it was for my woodworking business that had similar issues - multiple years of losses before I closed up shop. The analysis confirmed what I suspected - that my audit risk was actually quite low despite the consecutive losses because of my good documentation and the fact I had closed the business properly. The platform identified exactly which deductions might raise flags and suggested additional documentation I should organize. Gave me peace of mind heading into tax season instead of constantly worrying about an audit letter showing up.

If you're really worried about a potential audit, one major problem is actually getting someone at the IRS on the phone to discuss your situation. I was in a similar position and spent WEEKS trying to get through. Finally used Claimyr (https://claimyr.com) and it was game-changing. They got me connected to an actual IRS agent in about 15 minutes when I'd been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with was actually able to review my account and confirm my closed business status was properly recorded, which gave me huge peace of mind. Much better than wondering if I'd done something wrong. Sometimes just talking to someone official can save you months of anxiety.

I take back what I said about Claimyr. After my skeptical comment, I actually tried the service because I was desperate to resolve an issue with a missing form. Was shocked when I got connected to an IRS rep in about 20 minutes after spending literal days trying myself. The agent confirmed that businesses with under $50k in revenue that shut down after consecutive losses are very low on their priority list for audits. She even checked my account specifically and said there were no flags. Worth the peace of mind to hear it directly from the IRS instead of worrying about theoretical audit chances.

Don't stress too much about the 3 out of 5 year rule. I ran a craft business with losses for 5 straight years before finally turning a profit in year 6. Never got audited. Make sure you have these things well documented: 1. Business plan showing you intended to make profit 2. Records of marketing efforts 3. Time logs showing regular effort in the business 4. Modifications you made trying to improve profitability 5. Photos/evidence of inventory The hobby loss rule is more about intention and effort than actual results. The fact you formally closed it shows you were treating it as a real business making rational decisions.

The audit risk stuff is important but don't overlook making sure you handle the business closure properly! When I closed my little consulting business last year, I had to: 1. File final employment tax returns (if you had employees) 2. Issue final W2s/1099s 3. Cancel EIN 4. Close business tax accounts with state 5. Report sale/disposal of business assets 6. Maintain records for at least 7 years Did TurboTax walk you through all these steps?

I completely understand your anxiety about this situation! I went through something very similar with my small photography business that had losses for 3 years before I closed it. Here's what helped put my mind at ease: the IRS audit statistics show that Schedule C businesses with gross receipts under $100k have an audit rate of less than 1%. With your highest year being $47k, you're well below that threshold. The key thing about the hobby loss rule is that it's not just about the 3-out-of-5-year test - the IRS looks at nine factors including whether you operated in a businesslike manner, kept good records, and made changes to improve profitability. Since you mentioned you were legitimately trying to run a business and made the rational decision to close when it wasn't working, that actually supports your case. Keep all your documentation organized (receipts, bank statements, inventory records, any business correspondence) just in case, but honestly, your situation sounds very low-risk. The IRS is generally more concerned with larger operations or obvious red flags like claiming massive losses on minimal income.