Professional tax prep reduces audit probability

An audit from the Internal Revenue Services is one hassle people day trading for a living likely want to avoid at all costs.

For sole proprietors filling out a Schedule C for their day trading taxes, Fox Business says the chances of an audit are much higher than they would be for people working off of a W-2. To reduce that risk, the source says people may want to have their taxes completed by a professional.

Fox Business says the IRS is more likely to audit self-reported tax forms simply because they don't feel most people have as much of a grasp of the tax code, regardless of whether or not they do. Returns prepared by professional accounting firms carry more credibility with the agency, and may be less likely to be singled out for an audit.

The source added that in the event of an audit, day traders should make sure they have documentation to back up all the tax deductions made during that year. Home office and auto expenses are two of the most closely scrutinized categories of deductions, it says.

The source added day traders who officially incorporate their company as a LLC or corporation may also be less likely to be audited by the IRS. However, because these changes could have significant impacts on other parts of the company, business owners should have a full discussion with an accounting firm and lawyer before deciding to make any changes to the structure of the company.