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The IQD Team Five Audit-Proofing Tips for the Self Employed

11/8/2011

 
Five Audit-Proofing Tips for the Self Employed 

By Bonnie  Lee Petri
 
Published May 12, 2011 | FOXBusiness
 
 
When you’re self employed filing a Schedule C with your tax return, your chances of being audited are greater than if you were a wage earner.
 
Why? Because the IRS suspects that you will attempt to either hide income or write off personal expenses as business deductions. Let’s face it, if all you are reporting on your tax return is income from a W2, what’s there to audit? Even if you input the numbers wrong, the IRS will match it up with the copy it got from your employer and send you a correction letter along with an adjustment to your refund or tax liability. According to various reports, audits of the self-employed are on the rise, here’s what you can do to keep the taxman off your back:
 
1. Use a professional software system to track the income and expenses of your business. Your credibility increases in the eyes of an IRS agent if your tax return is based on professionally-prepared financial statements, especially if maintained by an outside firm. You can use the same software to track your personal income and deductible expenses as well.
 
2. Document red flags. You are allowed to deduct all “ordinary and necessary business expenses” which translates into thinking in terms of “Would I make this purchase if I didn’t have this business?” If the answer is no, than you more than likely have a deductible business expense. But it’s important to know the rules and to have proper documentation to substantiate the deduction. Some expenses receive considerably more scrutiny than others.
 
The IRS loves to investigate automobile expenses as taxpayers are required to keep a mileage log, which can be a lot of work. Even though I have met only client who kept a log, I’ve represented clients in numerous audits and found other ways to substantiate the deduction to the satisfaction of the auditor. Here are some tips:
 
- If you use an appointment book or calendar, save it along with your copy of the tax return. A mileage log can be reconstructed from those pages.
 
- Save vehicle repair receipts as the odometer reading is recorded on them and total mileage for the year can be extrapolated if there is more than one receipt.
 
Record your beginning and ending odometer reading in your appointment book on Jan. 1 and again on Dec. 31.
 
- Travel, meals and entertainment expenses are close runner ups when it comes to scrutiny. Go to www.irs.gov and read Publication 463 to determine what you can and can’t deduct. Here’s what you need to know:
 
- Travel, especially to vacation destinations like Las Vegas or Hawaii should be documented with more than purchase receipts to prove business intent. Save things like flyers advertising the trade show or the continuing education seminar or letters from prospective clients at that location in your tax file to prove the purpose of the trip was primarily for business.
 
- On receipts for meals and entertainment mark the name of the person entertained and a brief note describing the business purpose.
 
With more people working remotely, home office expenses have become another favorite target of the IRS. Here’s what you should know:
 
- Take photographs of the house and the office area. The photos will serve two purposes: they will show the proportion of the business area compared to the personal living area to substantiate the amount of space claimed as well prove that there is in fact a business area.
 
- Know the rules: The home office must be your principle place of business and must be used exclusively and on a regular basis for business purposes.
 
3.) Document sources of all income. If you are audited, the first thing the IRS agent will do is add up all of the deposits from your personal and business bank accounts. If more money went into the bank than was declared on your tax return, the agent will want to know where the money came from and whether or not the income is taxable. If you use QuickBooks for your personal and business books, you will automatically tie out this income, but you still need proof. If the income you record is not taxable (e.g. gifts, inheritances, loans, transfers from personal funds) keep a copy of the check or document that accompanies the income to prove the source is not taxable.
 
4.) Let a professional prepare your income tax return. Self-prepared returns are more likely to be audited because the IRS thinks a nonprofessional has limited knowledge. Tax law is complex. And if you are self-employed, no matter how small your business, your tax return is now a complex creature.
 
5. Rethink your legal form. Corporations, LLCs, and partnerships are less likely to be audited, but that should not be the sole reason to incorporate. Discuss this option with a tax professional and your attorney before making any changes.
 
http://smallbusiness.foxbusiness.com/finance-accounting/2011/05/12/audit-proofing-tips-self-employed/

The IQD Team IRS Video Portal: Small Business: All Topics

11/8/2011

 
IRS Video Portal: Small Business: All Topics


http://www.irsvideos.gov/SmallBusinessTaxpayer
 

The IQD Team IRS Video Portal: Small Business Tax Workshop

11/8/2011

 
IRS Video Portal: Small Business Tax Workshop

The Virtual Small Business Tax Workshop is composed of nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities. Those lessons are:
Lesson 1 - What you need to know about Federal Taxes and your new business
Lesson 2 - How to set up and run your business so paying taxes isn't a hassle
Lesson 3 - How to file and pay your taxes using a computer
Lesson 4 - What you need to know when you run your business out of your home
Lesson 5 - How to set up a retirement plan for yourself and your employees
Lesson 6 - What you need to know about federal taxes when hiring employees/contractors
Lesson 7 - How to manage payroll so you withhold the right amount from employees
Lesson 8 - How to make tax deposits and file your payroll taxes
Lesson 9 - What you need to know about Federal Unemployment Taxes (FUTA)

http://www.irsvideos.gov/SmallBusinessTaxpayer/VirtualWorkshops

The IQD Team IRS Video Portal: Starting a Business

11/8/2011

 

The IQD Team IRS Video Portal: Starting a Business

11/8/2011

 
IRS Video Portal: Starting a Business
IRS Videos:   Starting a Business:  Titles:

Recordkeeping Phone Forum
Keep the right records, for the right amount of time, for business tax reporting purposes. Also learn about what basic examination procedures to expect, if your business account is audited.
 
Good Recordkeeping – Keeping Good Records Reduces Stress at Tax Time
Start planning for the tax filing season by ensuring your records are organized.
 
Electronic Records
As more small business taxpayers are going paperless, they are using accounting software to maintain their books and records electronically.  Electronic records can include databases, saved files, e-mail, instant messages, faxes, and voice messages.
 
Retirement Plans
A retirement plan has benefits for everyone – the employer, the business and, of course, the employees.  Employers may also be eligible for tax credits or incentives for starting a retirement plan.  Keep in mind that tax law changes may affect a retirement plan. Be sure to stay up-to-date with any tax laws. 
 
Recordkeeping
Use a recordkeeping system that accurately reflects your income and expenses.  Records must support all income, credits and deductions listed on your tax return.  Keep all receipts, payment information and tax information in one location to make filing taxes easier when the time comes.
 
Seasonal Businesses
Seasonal help is often needed for sporting events, holidays, and commercial fishing or harvest seasons.  Seasonal employees are subject to the same tax withholding rules that apply to other employees.
 
Hobby or Business
Many a business starts out as a hobby and then turns into a profitable activity. If you reasonably expect to earn a profit; you have more than a hobby, you have a business.
 
Schedule C: Who needs to file and how to do it
This presentation is for Schedule C filers who are one-owner businesses or self-employed taxpayers.  Good recordkeeping is very important to the business owner or self-employed person in order to have everything needed when it comes time to file a tax return. Schedule C is filed annually as an attachment to Form 1040, the individual tax return.
 
Schedule C: First Time Filers
A presentation for new business owners and information about filing a Schedule C, “Profit and Loss From Business.” This form is used to report the business income and expenses for a sole proprietor.

http://www.irsvideos.gov/SmallBusinessTaxpayer/StartingaBusiness
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