Let’s face it – nobody wishes for extra attention from the IRS. Most of us probably wish they’d forget we ever existed! Next year, the IRS may be paying special attention to the following three taxpayer issues. If you want to avoid an audit, keep your nose clean on these points:
Omitting Business Income
Don’t do it. Be sure to report all income. The IRS usually knows what you’ve made anyway. If you’re an independent contractor, your income is reported to the IRS on Form 1099-MISC. They’re also aware of income from partnerships and S corporations through schedule K-1 filed by the entities. And banks, PayPal and other processors of credit cards and electronic transfers report these transactions on Form 1099-K. However, some small businesses deal largely in cash, such as salons, car washes, coin-operated amusements, convenience stores, taxi companies, scrap metal dealers and laundromats. These business owners might be tempted to fudge their reported income, sometimes just out of laziness, or perhaps thinking, ‘Eh, failing to mention this little bit won’t make a difference.’ The IRS hunts for businesses that don’t report income. If there’s any kind of fraud involved in your omissions, the IRS may pursue criminal penalties. Be fastidious with your income reporting, always.
Misclassifying Workers
Many businesses today are using independent contractors instead of hiring employees. Why? Employees cost more money, including Social Security and Medicare taxes, unemployment taxes, workers’ compensation and more. There’s nothing wrong with classifying someone as an independent contractor if that’s truly what they are. True independent contractors should be allowed to work whenever, wherever, and however they want. But if you’re asserting control over any of these areas, you’re dealing with an employee. In recent years, there’s been a rise in misclassification of workers, and the IRS is cracking down. (In 2013 alone, the U.S. Department of Labor recouped over $83 million back in wages for about 108,000 misclassified workers.) If you misclassify workers and the IRS correctly treats them as employees, you can face severe penalties and interest.
Falsifying Documents
Suppose you want to take a deduction on business mileage driven in your personal vehicle, you would need to keep an accurate record of mileage as evidence. If you learn that you will be audited and you failed to keep those records, you may be tempted to create months of false documents. The IRS is smarter than you might think. They’ve been able to prove phony documents in many cases. When found guilty of falsifying documents, not only could you face civil and criminal charges for fraud, but you could be penalized with additional taxes and interest. It’s just not worth it.