Who among you have you been audited due to your reported mystery shopping Schedule C income or reported losses? I am interested in the frequency that this sort of self-employment triggers an audit. Furthermore, have you been challenged on your assertion that your work qualifies as a business due to consecutive years of losses? Particularly, the 3-year out of 5 rule of thumb? Does the IRS "go after" mystery shoppers at an unusually aggressive rate, in your collective experiences?

Nope. I have been audited, but MS income was not the reason. The IRS did NOT find any violations or money owed during the audit. MS income was not even glanced at. btw I have never has 3 consecutive years of Schedule C losses for ANY of my schedule C businesses, since I began doing IC work in 1972!

I have never heard of a shopper being audited specifically due to MS income.

It's my understanding that micro-businesses are not a particular target for the IRS, and that those under $100,000 of income are audited with a much lower frequency. It's probably just not worth their time.

That said, they do follow the 1099's much closer than they used to in my experience. I misplaced one a few years back and did not include that income on my return. A few month after I filed, I received a very nice note from the IRS explaining the differential, readjusting my return based on it and a promise that no fine would be levied if I paid the difference within 2 weeks, which I promptly did. It was not a large amount since the 1099 was under $1,000.

When I filed our taxes last year, we had 5 different 1099's for various things, 3 of the 5 of them were actual businesses (one of them being mystery shopping). Quite honestly I was nervous I'd "red flag" but then about a month ago my husband received a notice he was audited from 2011's tax year. My thing is if I get pulled then just be truthful and make sure you have your documentation. If you only make $1k then don't have a ridiculous amount of expenses against that business and you should be fine. But I agree with Steve, minimal money vs $100k isn't worth their time. Best of luck!

I just had my audit closed. The taxes due (according to the IRS) were over $10K. For some reason, they didn't notice that I had declared all of my 1099 income and all of the other income that was not on 1099's. They were seeing a lot of income in duplicate because I was paid by PayPal (which also got me another 1099).

Huge PITA. I ended up owing $0. Household income is way over $100,000. I had to pay the CPA to contest it (worth it though).

Only once when I fist retired and rolled over an annunity. They wanted me to pay on the entire amount. And then there was the time the state claimed I had not paid even though I sent them copies of my checks.

I do not understand why people fear being audited. An audit results in one of three things: one finds out that one has overpaid taxes and receives a refund, one finds out that one properly paid the right amount, one finds out that one underpaid taxes and is given the opportunity to pay one's proper share. Who doesn't want to pay her/his fair share of taxes? Well, lowlifes and criminals. But for everyone else, an audit is, at worst, just a trivial bit of life.

My concern is for the peace of mind of my husband, who is the financial arbiter and guru in this household. Over decades, he has absolutely and steadfastly paid every dollar (and then some) of tax that was owed. If there was anything that had been paid, but was without receipt, no matter how trivial, he would eschew its use. He far preferred overpaying, than worrying about any question that might arise. This is a second marriage for both of us, though of 30-some years standing. My entry into mystery shopping caused him some discomfort and a fair amount of head-shaking. Then, when the first year ended, (which comprised a full year of taxable income and records AND the bottom line was a loss) his angst took on real angsty proportions. He "humors me" in my MS activities and sometimes even gets caught up in its observations, as he was first trained and worked as an Industrial Engineer, so timing and efficiencies are central to his core. As we once again head into tax season and he readies his investment data, medical deductions, and the like, it occurred to me, he would perhaps be soothed by learning that IRS is NOT necessarily lying in wait for OUR return to be pounced upon due to the RED FLAG of mystery shopping waving over and from the Schedule C.

So far, it seems there is no pattern of undue or unwanted notice being paid to the returns of my brethren. Can I get a witness??

And, thanks to all, who have responded to date. I appreciate the time and interest taken in sharing your experiences.