Self-employed, 'SCHEDULE Cs' In IRS Crosshairs
In early January 2012, IRS issued their tax gap analysis for the 2006 tax year. It was the first update since the analysis was done for the 2001 tax year. During those five years, the gross tax gap has grown from an estimated $345 billion to $450 billion. Gross tax gap is defined as the amount of true tax liability owed by taxpayers (including individuals, corporations, estates, and employers) that is not paid on time. Individual income tax continues to be the area where the largest gap exists—with business income being the largest component of individuals' underreporting. As such, IRS audits will no doubt focus on sole proprietorships in the upcoming months.
New and stiffer penalties are in place regarding the failure to file 1099's in hopes to narrow the non-reporting gap. In addition, compliance with the substantiation rules regarding business travel, meals and entertainment is another hot topic within IRS audits. In order to deduct these expenses, you must maintain documentation of the date, amount, location, attendees, and business purpose of each expense. Credit card statements are not considered sufficient documentation.
Another area of focus is income from foreign bank accounts. For 2011, IRS has added a new reporting requirement for certain individuals that hold foreign assets. Form 8938 (Statement of Specified Foreign Financial Assets) is required if the total value of your specified foreign financial assets exceed various filing thresholds depending on your marital status and whether you reside in the U.S. or abroad. The filing of Form 8938 does not relieve you of the FBAR Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) filing requirement. Failure to file these forms and report any corresponding income on income tax returns is subject to major penalties.
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