Potential IRS Problems for the Self-Employed

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.