Are you in the fast lane for a tax audit?
A Tax Audit Can Cripple Your Business
Did you know that back taxes and penalties can cripple a business and involve personal liability too? Many small businesses believe that if they have a separate business entity they are shielded from personal tax liability. This is not necessarily the case. In fact, even if you close your business you may still be liable for the taxes owed. Even if you are only an investor in the business you may still be liable. But wait, you did not participate in the daily running of the business so why are you liable? Well, it just depends on what you knew or should have known about the tax liability.
Self-employed – You’re a Prime Audit Target
If you have are self-employed, have high income ($100,000 or more), are a small business owner, itemize your returns, or operate a business that usually accepts cash payments then you are a high audit risk. According to the IRS most people that cheat on their taxes are self-employed. Not surprisingly, the IRS’s Small Business/Self-Employed Division is the biggest of all.
- If you are self-employed and you report your income on a Schedule C form or Schedule E you are considered a prime target for an audit. The IRS usually wants to double check that you are claiming deductions that you are entitled to. But, you don’t want to forgo a deduction thinking that it will keep you from being audited. Why? Because you may be audited anyway or miss an opportunity to take advantage of a deduction that may give you the funds needed to reinvest in your business.
The IRS has three major areas of concern:
- Whether you wrongly classified employees as independent contractors.
- Whether your business is making payroll tax deposits.
- Whether all transactions especially large cash transactions are being reported to the IRS
If you have independent contractors you need to evaluate whether they should be classified as employees. Some factors the IRS considers in determining whether some is an employee or independent contractor include:
- You require – or can require – the worker to comply with your instructions about when, where, and how to work
- You train the worker to perform services in a particular manner
- You require the worker to render services personally; the worker can’t hire others to do some of the work
- Your business has a continual relationship with the worker or work is performed at frequently recurring intervals
IRS Can Easily Get Your Bank Records
If the IRS chooses to come after you by audit or worse a criminal investigation be aware that it can easily get at your bank and other financial records. So, if you’ve been foolish enough to deposit unreported income in your bank accounts, the IRS can find it.