Because the IRS claimsthat most tax cheats are in the ranks of the self-employed, it is notsurprising that this group is more closely scrutinized than are wageearners. If you are self-employed and the IRS chooses to come after youby way of an audit -- or worse, a criminal investigation -- be awarethat the agency can obtain your bank and other financial records. Ifyou've been foolish enough to deposit unreported income in your bankaccounts, an IRS auditor may know it.
If you are investigated, expect the IRS to ask the followingquestions or look into the following issues:
- Did you report all of your business sales and receipts?
- Did you write off any personal living expenses as businessexpenses?
- Does your lifestyle apparently exceed the amount ofself-employment income reported?
- Did you write off automobile expenses for travel that wasnot business-related?
- Did you claim large business entertainment expenses?
- Are your workers wrongly classified as independentcontractors when they are legally employees?
- Are you making payroll tax deposits?
- Are you reporting all cash transactions -- especiallylarge cash transactions?
If you have employees, always make federal payroll taxdeposits when they are due. Never borrow from your employees' taxfunds. Even if you eventually make the payment to the IRS, thepenalties and interest can be substantial. Pay Uncle Sam first, notlast. If you can't pay, then maybe you shouldn't be in business.
One good way to see that payroll taxes get paid on time is touse a bonded payroll tax service to both file and make all payroll taxdeposits. Many banks, as well as business called payroll servicescompanies, offer this at reasonable prices. If they goof up and don'tget a form or payment in on time, they will pay the late paymentpenalty.
