Tax Audits and the Self-Employed

There is no wonder that the self-employed are targeted, who in fact many times do cheat, on their IRS returns. After all, they are not subject to a typed W-2 that is submitted to the IRS by an employer. Cash and Checks are simply given to the company, which is usually controlled by the owner in smaller companies. Many times, cash goes unreported, but one of the mistakes that the IRS auditors commonly catch is larger cash deposits going into the bank without that amount ever being recorded in the books. Additionally, it is easy for the self employed to claim just about everything as a write off. You would be surprised by how many self-employed individuals claim a sound system as a write off.

Another red flag is when all of the small company’s employees receive a 1099 instead of a W-2, yet they work for them regularly or more than half of the year. It may be a common mistake, but one worth learning the laws when it comes to sub contracted services versus company employees.

Many times, the small self-employed business owner is overwhelmed with tasks, and usually hasn’t taken a course on how to handle their books, taxes or accounting practices. Making the correct payroll tax deposits is essential when it comes to IRS audits. This will be one of the first things that the auditor looks for. Additionally, keeping receipts, documenting mileage and deciphering between what was used for business purposes or individual needs are all tedious tasks but necessary to get through the dreadful IRS audit.

There is tax and accounting software that will aid in keeping track of your deductions, expenses, and even employee payments if your are self-employed. This may be a better investment then the tax bill you could receive if the IRS audits you. Once the audit happens, mistakes will more than likely be found. Hopefully, the mistakes aren’t large enough for the auditor to refer you for criminal investigation. Two of the common “mistakes” that are easily avoidable are to not withhold income information and don’t take deductions for items that you didn’t have to pay for. Claim all of your income. These two suggestions are minimal efforts but could save you a thousand dollar headache. Lastly, don’t be foolish enough to deposit unreported income. The tax auditor will have access to you banking information and other financial documents.