Are You an IRS Target?

Because the IRS claims
that most tax cheats are in the ranks of the self-employed, it is not
surprising that this group is more closely scrutinized than are wage
earners. If you are self-employed and the IRS chooses to come after you
by way of an audit -- or worse, a criminal investigation -- be aware
that the agency can obtain your bank and other financial records. If
you've been foolish enough to deposit unreported income in your bank
accounts, an IRS auditor may know it.

If you are investigated, expect the IRS to ask the following
questions 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 business
  expenses?
• Does your lifestyle apparently exceed the amount of
  self-employment income reported?
• Did you write off automobile expenses for travel that was
  not business-related?
• Did you claim large business entertainment expenses?
• Are your workers wrongly classified as independent
  contractors when they are legally employees?
• Are you making payroll tax deposits?
• Are you reporting all cash transactions -- especially
  large cash transactions?

Payroll taxes

If you have employees, always make federal payroll tax
deposits when they are due. Never borrow from your employees' tax
funds. Even if you eventually make the payment to the IRS, the
penalties and interest can be substantial. Pay Uncle Sam first, not
last. 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 to
use a bonded payroll tax service to both file and make all payroll tax
deposits. Many banks, as well as business called payroll services
companies, offer this at reasonable prices. If they goof up and don't
get a form or payment in on time, they will pay the late payment
penalty.

Cash transactions

As part of a government campaign against the underground economy in
general, and drug-related money laundering in particular, the law
requires that cash and cash equivalent business transactions over
$10,000 be reported to the IRS on Form 8300. (For a detailed pamphlet
explaining this law, see IRS Publication 1544, Reporting Cash Payments
of Over $10,000.) These report forms are called Currency Transaction
Reports, or CTRs. Some state tax agencies have similar reporting laws
and forms.

If you don't file a Form 8300 when you should and the IRS
finds out, you can be fined, audited or both. You can also get in
trouble criminally -- CTR violations are investigated by the IRS
Criminal Investigation Division.

Cash businesses

If your business deals in a lot of cash -- for example, you run a bar,
a restaurant, vending machines or a laundromat -- the IRS may suspect
you of skimming cash off your receipts. This is true whether you file
Form 8300 or not. The audit potential of cash businesses is much higher
than average.

Copyright © 2000
Nolo.com, Inc.