Sole Proprietor’s Unreported Income Increases the Tax Gap

QUESTION:

I have heard that the IRS is going after small sole proprietorship businesses more aggressively. This doesn’t seem fair. What is the reason for them doing this and what can I do to protect my business?

ANSWER:

In a recent report the U.S. Government Accountability Office showed that at least 61% of sole proprietors underreport their net business income each year. This adds to the growing “tax gap” that the IRS is trying to shrink. The tax gap is the difference in the amount of taxes that should have been reported and paid and the amount of taxes that were actually reported on tax returns. The underreporting is not a huge problem overall with only 10% of underreported taxes being greater than $6,200.00. But as they say, one bad apple can spoil the whole bunch. The reason sole proprietor income is subject to being underreported more easily than other types of income is that there is likely not a third party reporting income to the sole proprietor and there is no withholding requirement. You should work hard to make sure that you keep accurate income and expense records for your business to make sure you can prove all expenses to the IRS should you be audited. That is one of the most frequent reasons for not coming out of an audit successfully. If you find your business owing money to the IRS and would like some help to get things straight, please call my office today for a free consultation. You will be under no obligation and you will be able to find out some options to help resolve your IRS liability. We also handle probate, real estate, wills and family court matters.