Writing Off a Loss for a Hobby
If you have a hobby you’re really passionate about, you should be VERY careful about filing a Schedule C with losses from said hobby. If you even have multiple years of hobby losses and you have lots of income from other sources, your risk of an audit goes up once more.
If you plan on turning a hobby into a job during retirement, you should be especially careful, as the IRS will be paying a lot of attention to your tax return. You’ll be in the clear if you run your activity in a business-like manner, but you should also have reasonable expectations about making a profit.
The law will presume that you’re in business to make a profit if you generate a profit three out of five years. During an audit, the IRS will ask for proof that you have a legitimate business and not a hobby, which is why it’s so important to keep supporting documents for all of your expenses.
Failing to Report Gambling Winnings or Claiming Big Losses
Are you a recreational gambler? Then you have to report winnings as other income on the 1040 form as opposed to professional gamblers who have to show their earnings on Schedule C.
Don’t think about omitting your winnings. Why? The casino or other venue most definitely reported the amounts on Form W-2G, so the IRS already has all the information it needs.
But say you want to claim large gambling losses. If you report gambling winnings then, sure! If you fail to do the latter, expect an audit from the IRS. When the IRS also receives a Schedule C with large gambling losses, they’ll want to take a closer look to ensure that that person is definitely making a living (or trying to) from gaming.