Tax Term of the Week

Schedule C [Profit and Loss from Business]- When a taxpayer has an unincorporated business and is a sole proprietor business owner, they are required to file taxes on Schedule C attached to their IRS Form 1040. Schedule C allows taxpayers to deduct the expenses incurred during the tax year from the gross income received. Schedule C taxpayers are required to pay half of their Self-Employment tax since they work for themselves. Any debt incurred by a sole proprietor will be recorded as a 1040 liability under the taxpayer's SSN and can be found on their IMF (Individual Master File). Taxpayers need to be able to prove the figures listed on the 1040, Schedule C.

Raising a Red Flag...

Many actions taken when preparing tax returns can eventually raise a red flag. For obvious reasons, the IRS refuses to come out and explain how it goes about selecting tax returns to audit. However, some trends can be observed. For example, if your tax return included a Schedule C detailing any self-employment income, you are three times more likely to face IRS questioning. In addition to this, the IRS has even gone so far as to state that it will be stepping up audits of filers who run their own unincorporated businesses.

Explanation: Tax officials believe that many self-employed individuals underreport their income. A major factor contributing to this attitude is that this type of income is difficult to verify (i.e., the IRS cannot double-check much of this type of income in the way it can verify wage income via an employer-issued W-2). You can’t blame them for having this rationale. No offense, but if it was up to you to voluntarily report your income in an accurate manner, all the while knowing that it will be difficult for me to verify your numbers, I wouldn’t trust you either.

So don’t be shocked if you are audited. It’s not a big deal and is actually nothing to worry about as long as the figures you are reporting are legit. Now if you lied on your tax return…you might be screwed.

Cheers!
Taxus