If you own a business that is reporting losses year after year, the IRS may grow suspicious that it's actually a hobby.
"There's a rule-of-thumb saying you must have a profit in two [out] of five years -- if you don't have a profit they're going to look at it as a hobby," said Buckingham. "You can rebut that presumption by showing that maybe what you're doing is increasing the value of assets but not necessarily the profit."
One example is a business like a garden nursery, where you have to spend a lot of money growing trees and plants but won't get a real return on that investment until they are grown, she said.
To fend off the IRS, make sure to keep diligent financial records and do little things like have business cards and company letterhead.
Sometimes, though, it's beyond your control. One of Buckingham's clients, an ice cream store owner, was audited two years in a row after reporting losses for both years. The IRS agent said the agency couldn't figure out how the client was living day-to-day if her primary business was losing so much money.
What they didn't realize was that she had refinanced her mortgage and was living off of that. Both audits resulted in no changes to her refunds, and the audits then stopped.
