What are my chances of being audited for a small online business with 4 years of losses?

But doesn't the fact that they closed down the business show the IRS that it was actually a real business attempt that just didn't work out? Also, does the small amount of revenue ($42k) make it less likely to be audited since bigger fish to fry and all that?

Closing down an unprofitable business can actually support your case that it was a legitimate business venture and not just a hobby. It shows you were rational about the economic reality when the business wasn't succeeding, which is businesslike behavior. The relatively small revenue amount may reduce your audit risk somewhat. The IRS does allocate more resources to higher-revenue audits with better return on their time investment. However, small businesses still get audited, especially when certain patterns appear. Your best protection is thorough documentation of your business intent and operations - keep all records showing marketing efforts, business plans, separate business accounts, and attempts to reduce expenses or increase revenue.

Does this actually work for small business situations? I've had a photography business showing losses for 3 years and I'm getting paranoid about audit risk too.

I'm skeptical about these kinds of tools. How does it actually determine audit risk when the IRS doesn't publish their exact audit selection criteria? Seems like it might just be generalizing based on common knowledge rather than offering anything precise.

For photography businesses specifically, it works really well because it can analyze your Schedule C for potential red flags compared to industry standards. It looks at your expense ratios and other factors that might stand out compared to similar businesses in your field. The tool doesn't claim to know the IRS's exact algorithm, but it uses historical audit data and known risk factors to give you a reasonable assessment. It's particularly helpful for identifying documentation gaps - like pointing out which business expenses might need extra substantiation based on your specific situation. It's not perfect, but definitely more detailed than general advice.

Wait how does this even work? I thought it was impossible to get through to the IRS. Do they somehow have a direct line or something?

This sounds like a scam. The IRS doesn't give priority access to third parties. I bet they just keep auto-dialing and then charge you for the privilege once they get through. You could do the same thing yourself for free.

It uses an automated system that keeps calling the IRS until it gets through, then it calls you and connects you to the agent. No magic direct line - just technology doing the waiting for you instead of you having to redial constantly and sit on hold. I was skeptical too at first, but when you're trying to resolve an issue with a looming deadline and can't afford to spend hours each day on hold, it's pretty valuable. It's definitely not giving any special "priority access" - it's just handling the frustrating part of the process for you.

Thanks for sharing those stats - that does make me feel better. Just curious, where did you find those numbers? And what would be considered other "major red flags" besides the consecutive losses?

I got those stats from the IRS Data Book which they publish annually. The latest numbers show small business audits have been declining due to IRS budget constraints, though that may change with recent funding increases. Major red flags beyond consecutive losses include unusually large deductions compared to income (especially home office, vehicle, travel, meals), round numbers that suggest estimation rather than actual record-keeping, substantial cash-based income, and claiming 100% business use for vehicles. Also, mathematical errors or inconsistencies between forms can trigger automated reviews that sometimes escalate to audits.

I was audited back in 2023 for my crafting business that had losses for 4 years. It was a correspondence audit (mail only). They asked for receipts for all my expenses and evidence it was a real business (website screenshots, business cards, show applications). It was stressful but I had good records and they accepted everything. Whole process took about 5 months.