Solo Business Owners: Beware of IRS Focus on Schedule C

The IRS is planning to focus a lot more on the Schedule Cs that are filed with taxpayers’ 1040s this year because they think that’s a major source of the tax gap. That’s the difference between what the IRS thinks taxpayers should be paying in Federal income taxes and the amount that taxpayers actually report as their tax liability.

What causes the tax gap?

There are three main reasons that the tax gap exists

1. Taxpayers don’t report all the income they receive
2. Taxpayers take deductions they aren’t entitled to or can’t prove
3. Some business owners don’t file a return at all

According to the instructors at a recent tax seminar I attended, some of the areas that the IRS is expected to look at closely this year include

1. Hobby activities being claimed as businesses
2. Cash sales not being reported
3. Personal items being deducted as business expenses
4. Improper expensing of capital items
5. Inadequate documentation for auto, cell phone, and entertainment expenses
6. Startup expense deductions greater than $5000 in the first year
7. Industries for which audit guides have been issued

I can’t be certain this will happen; just sayin’