Potential IRS Problems for the Self-Employed

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According to the IRS a staggering 30 million United States taxpayers have some type of compliance or collection “issue.” Of course this could include something as relatively minor as an unfiled tax return or a more serious pending federal tax lien or non-payment of back taxes. Far and away the most frequent issues targeted by the IRS come from self-employed taxpayers who have failed to file a return, paid no taxes or didn’t pay enough taxes. Those who are self-employed may feel – at least in the beginning – that being self-employed means being their own boss and doing whatever they please. Of course the reality of running a business every day will soon set in and some days the self-employed may wish they were back at a 9-5 job where the responsibilities are greatly reduced.

You Must Act Like the Boss

The main thing the self-employed person must remember is that he or she is the boss—even the boss of oneself. As such there are specific tasks and responsibilities that the self-employed person must be disciplined enough to keep up with. The self-employed business owner must either take the necessary time to learn the tax laws which relate to their specific business or must hire a trusted, skilled professional to take care of taxes. A bookkeeping system which meshes with tax laws is crucial as well. Unfortunately a great number of us absolutely loathe paperwork—including tax preparation—and avoid dealing with it until there are penalties and costs involved.

Audit Flags

If you happen to be self-employed then you are already at a much higher risk of being audited, particularly if you claim deductions—even perfectly legitimate deductions. If you are audited by the IRS, they can-and will- ask for all your financial records. The primary issues the IRS will be looking for during an audit will be whether you reported all business sales and receipts, whether or not your lifestyle seems to exceed the income you reported, whether or not you reported your cash transactions, whether you used personal deductions on your business taxes, whether your payroll deposits were correctly done and how you are classifying your employees. (Some small businesses classify regular employees as independent contractors in an attempt to avoid payroll taxes and the headaches which accompany them.)

If you do have regular employees, never, ever “borrow” from this fund thinking you will pay it back next week or next month or next year. In most cases that never happens and suddenly you are being audited for failure to make the required federal payroll tax deposits. The penalties and interest can be huge, and you could even be subject to criminal charges, so always make sure your employee payroll taxes are correct and up-to-date.

Excessive receipts for business trips and dinners are also red-flags to the IRS, so keep them to a minimum and ensure you keep meticulous receipts and records for absolutely everything you might potentially use as a deduction on your taxes. If you find yourself in over your head, or under threat of an IRS audit, contact a knowledgeable tax attorney immediately in order to get the help you need.

Hurricane Isaac Tax Filing Relief Granted

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“IRS Provides Tax Relief to Victims of Hurricane Isaac; Return filing and Tax Payment Deadline Extended to Jan. 11, 2013”

In Information Release 2012-70, the IRS granted tax relief to victims of Hurricane Isaac for individuals and businesses located in certain counties and parishes that were affected by Isaac.

For tax returns due on or after Aug. 26, 2012, the affected individuals and businesses will have “until Jan. 11, 2013 to file these returns and pay any taxes due. This includes corporations and businesses that previously obtained an extension until Sept. 17, 2012, to file their 2011 returns and individuals and businesses that received a similar extension until Oct. 15. It also includes the estimated tax payment for the third quarter of 2012, normally due Sept. 17.”

Louisiana parishes include Ascension, Assumption, East Baton Rouge, East Feliciana, Iberville, Jefferson, Lafourche, Livingston, Orleans, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Washington and West Feliciana.

Mississippi counties include Adams, Amite, Clarke, Forrest, George, Hancock, Harrison, Hinds, Jackson, Lincoln, Marion, Pearl River, Pike, Stone, Walthall, Warren and Wilkinson.

Paul A. Grego
Attorney

3637 Canal Street
New Orleans, Louisiana 70119
Office (504) 302-4948
Fax (225) 208-1372

pgrego@pgtaxlaw.com
www.neworleanstaxlaw.com

IRS Red Flags – And How to Avoid Them

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Generally speaking you – or any person – have a 1 in 200 chance of being audited. This risk increases to 1 in a 100 if you make over $100,000 per year. Thankfully for most of us, the IRS has been forced to cut staff which means your odds of being audited just got a bit less likely. Even so, there are certain items in any tax return which the IRS considered “red-flags” as far as audits go. The number one red-flag is when it appears that your income doesn’t quite mesh with your lifestyle. The IRS routinely compares your stated income to your return from last year. Should there be a sizeable drop in income they may assume you are hiding money. They may also look at a huge mortgage as compared to your reported income and wonder where you are finding the money to live in such luxury. In other words, while minor variances are probably of little interest to the IRS, should you claim to be supporting six children and live in an upscale neighborhood on a stated income of $18,000 per year, you will likely have some serious explaining to do.

Cash Payments and Family Members as Employees

If you have your own business and hire your family members, you may have just raised another red flag. Of course hiring family members is not illegal, but many of the self-employed do it as a way of distributing money to their family while decreasing their overall tax liability. So, while you can certainly hire qualified family members to help out in your business—and pay them as you would any employee—you can’t distribute payroll to those who don’t actually work for you and you must always keep accurate and up-to-date payroll records.  The next IRS red flag comes when you work in a profession which the IRS knows is often paid in cash. Unfortunately, whether you cheat on reporting your cash income or not, the IRS may assume that you do. If you work in a cash industry, then you may as well get ready to be audited at some point so keep meticulous records and, ideally, seek professional tax preparation advice.

Alimony Payments, Business Expenses and Overseas Income

If you receive alimony or spousal support payments those payments must be reported as income and if you pay spousal support you may or may not be able to claim a deduction for the money. The thing to keep in mind is that your return and your ex’s return must match up, or the IRS will step in. When you run your own business, you may find the ability to claim deductions at tax time a truly wonderful thing. Be aware, though, that common sense must be exercised at all times. Particularly in the area of your business vehicle, keep your deductions at the sensible level. Keep an accurate log of the driving you do for your business and only deduct that mileage. You may also raise IRS red flags if you show your business has lost money for several years in a row or if you have overseas income.

If you have doubts about your tax returns or if you think you are about to be audited, it is definitely in your best interests to speak with a highly experienced tax attorney who can steer you in the right direction and help you through an audit.

 

IRS Provides Tax Relief to Victims of Hurricane Isaac For Louisiana and Mississippi Residents

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Hurricane Isaac Relief

For certain Louisiana and Mississippi residents, the IRS has extended the 2011 tax return filing and tax payment deadline as relief from the hurricane Isaac disaster. This filing relief will include most extended corporate and individual tax returns, originally due on September 15 and October 15.

“The tax relief postpones various tax filing and payment deadlines that occurred on or after Aug. 26. As a result, affected individuals and businesses will have until Jan. 11, 2013 to file these returns and pay any taxes due. This includes corporations and businesses that previously obtained an extension until Sept. 17, 2012, to file their 2011 returns and individuals and businesses that received a similar extension until Oct. 15. It also includes the estimated tax payment for the third quarter of 2012, normally due Sept. 17.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. In addition, the IRS is waiving failure-to-deposit penalties for federal employment and excise tax deposits normally due on or after Aug. 26 and before Sept. 10, if the deposits are made by Sept. 10, 2012.”

The filing relief applies to residents of the following parishes, Ascension, Assumption, Iberville, Jefferson, Lafourche, Livingston, Orleans, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Mary, St. Tammany, Tangipahoa, Terrebonne and Washington, and the following counties, Adams , Amite, Clarke, Forrest, George, Hancock, Harrison, Hinds, Jackson, Lincoln, Marion, Pearl River, Pike, Stone, Walthall, Warren and Wilkinson.

See IR-2012-70, Sept. 5, 2012