The IRS Line of Fire ? Why All the Gun Smoke?
Even though the IRS is responsible for successfully collecting over $2.1 trillion in gross collections, there is still an estimated $500 billion in shortchange produced by drug sales, organized crime, and other illegal activities. This huge sector of missed collection has come to be known as the underground economy. This underground economy is being brutally attacked by the IRS and as a result, innocent taxpayers are often being punished.
So how are you supposed to know if you are in the line of fire? Well, the IRS has five different categories it identifies as trouble areas. These are the self-employed, people who work out of a home office, independent contractors, cash-intensive businesses, and finally, non-filers.
This is defined as an unincorporated business or profession in which net income is reportable by only one person and runs from people who own a service business (beautician, tutors, or home service and repairs) to professionals (doctors, lawyers) to insurance agents or computer programmers and more.
For these types of people, the IRS is focusing on the type of business for which the schedule C is filed, particularly if the business type falls into one of the IRS target areas: service providers, professionals, or cash-intensive businesses.
If you are a sole proprietor and are at high risk for an audit, the perfect solution might involve extracting yourself from the sole proprietorship/Schedule C category and transforming your business into a partnership or corporation. This can often remove yourself from the IRS hit list.
As many as 40 million people work out of a home office, with at least 8,000 home-based businesses starting daily. Of these, 1.7 million claimed home-office deductions , amounting to over $3.7 billion.
The IRS decided that the people who take home office deductions comprise too large a portion of the underground economy. Clearly, the IRS?s most obvious solution was to investigate more of these types of filers.
To defend yourself against unnecessary audits, first make sure that you qualify for the Home Office Deduction. A good rule of thumb is: Those who can take the deduction are those who spend most of their working time in the office and conduct most of their important business there, like meeting with customers or patients on a regular basis.Those who do not qualifyare the ones spending most of their time in other places (gardeners, plumbers) and who only use their office for routine tasks like record keeping.
Once you?ve determined if you qualify, taking care of the many different ?gray areas? of the Home Office Deduction is the next step. Make sure you watch specific trouble areas like:
Every additional worker classified as an independent contractor means that the IRS loses tax dollars through unpaid FICA, withholding, and unemployment taxes, and through income tax deductions as well. Wouldn?t the IRS be delighted if all of these independent contractors were reclassified as employees and this whole category disappeared! To try to make this a reality, the IRS has waged an all out attack on independent contractors.
Some of the tactics used by the IRS to turn independent contractors into employees include:
An estimated 6 million people in the U.S. do not file any income tax returns whatsoever. That number is actually down from 9 or 10 million four years ago. About 64% of non-filers are self-employed people who deal primarily in cash. They have been out of the system for an average of 4 years, are in their peak earning years, and live affluently.
As a group, non-filers account for almost $14 billion a year in lost revenue to the IRS and cost each of the rest of us over $600 extra a year in taxes! The good news for those of us who fall into this category is that an average of 45% of all people using the Non-filer Reentry Program designed by the IRS actually received a refund the first year filing a return!
So what do you do if you are a non-filer?
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