A new report by the Treasury Inspector General for Tax Administration has recommended that the IRS take a closer look in sole proprietorship audits to find any unreported income.
IRS auditors already do a number of checks to look for unreported income, such as examining the “cost” of the sole proprietor’s lifestyle to see if his/her reported income would be able to support it. If you’re driving a brand-new BMW but reporting $20,000 in net business profit as your sole source of income, you should expect a lot of tough questions!
The new test being recommended includes a more sophisticated analysis of tax return data and the proprietor’s reported personal expenses to determine if they are roughly equal. With these new tests, the IRS stated they would have collected an additional $8 million in taxes from sole proprietors in 2008! This new focus on sole proprietors follows the IRS’s National Research Program estimate that sole proprietors are cheating the government of $68 billion each year.
If you operate your business as a sole proprietorship, your best defense against an audit is thorough documentation of both your gross revenue and your business deductions. The following posts can help you get started:
- How Good is Your Documentation?
- Do You Use Freelance Workers In Your Biz?
- Should It Stay or Should It Go?
- Top Audit Issues for Sole Proprietorships
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.
