IRS Targets: What to Do If You Are One Of Them

The IRS Line of Fire – Why All the Gun Smoke?

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.

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.

The IRS decided in the early 1990’s 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 qualify are 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:

• Maintain a separate telephone number for the business
• Encourage customers to visit your home office on regular basis
• Keep a visit log and a time log explaining what time you spend in your home office (stress the important activities you performed there)
• Make sure that business correspondence is sent to your home office, rather than to another place, like one of your biggest clients.

Following these simple tips can save you from horrible and costly IRS audits. More importantly, the tips listed above are the most simplified of all. Meet with your accountant if any of these tips look unchecked in your overall goals or simply look like new ideas to you. If these look new, you’re under the audit gun already! It’s important to take the time your business deserves to make sure your home office is audit-proof.

Some of the tactics used by the IRS to turn independent contractors into employees include:

• A 20-Factor Test
• Third party leads (basically just informers)
• A shift in IRS Examination Division resources
• Unannounced audit blitzes by the Collection Department

There are specific, key steps employers and independent contractors can take to strengthen their respective positions. A contract between the business owner and the independent contractor as a key item to assess worker classification and the IRS uses this. When drawing up a contract, there are defined elements and precautions to help guard against reclassification.

1. Specify the services to be rendered.
2. Use a defined starting and completion date.
3. Make sure the contractor is controlling the procedures necessary for completing the agreed-upon services.
4. Make sure the contractor is in complete charge of supervising and directing how the work will be performed.
5. Indicate all insurance to be provided by the contractor.
6. Try to keep payments slightly sporadic – to justify treating the worker as an independent contractor.
7. Avoid separately allocating funds for overhead costs like transportation and meals, since these should be included in the contract price.
8. Spell out that the training of the workers is the full responsibility of the contractor.
9. Do not include a provision that states the contractor has an office or working space on the business owner’s premises – if he (or you) needs the space, he/you will use it…there is no need to spell it out in black and white.
10. Avoid paying bonuses.
11. Tell the contractor that if things slow down, that he will not be given any more work to do. The business owner’s obligation is only for the work originally assigned and agreed upon.

1. Independent contractors should always be able to take on other assignments from other companies.
2. Contracts should never appear to be exclusive.
3. Independent contractors should be able to prove that they receive income from other sources. This will help legitimately determine their tax status as a self-employed person filing a Schedule C.
4. Incorporate yourself. There is no obligation to issue a 1099 form to a corporation. As the IRS hones in on the independent contractors reviewing 1099 forms, you will no longer be included in this group.

As a group, nonfilers 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 Nonfiler Reentry Program designed by the IRS actually received a refund the first year filing a return!

1. Relax.
2. Go to a tax professional.
3. The tax professional will contact your local IRS office and inform them that he or she has a case of a nonfiling taxpayer who wishes to file.
4. The tax professional will explain that information for the past however many years is missing or lost due to illness, divorce, or natural disaster, etc.
5. The revenue office will probably cooperate by providing the professional with income data entered under the matching program from the IRS computer listed under the taxpayer’s Social Security number.
6. Next the tax professional will reconstruct the 1040, enlisting the taxpayer’s support to fill in the information such as estimates of contributions, medical expenses, and other deductions. Revenue officers have been accepting reasonable estimates in cases like this.
7. This entire process could take as little as a few weeks or as much as a few months, if items can’t be found immediately.
8. The IRS will add up to 25% in penalties plus interest to the balance due. That is to be expected. However, perhaps you will be one of the 25% of nonfilers who are due a refund!

 
No one will deny that so far, the majority of the IRS’s attempts to pursue the underground economy has been successful. But if you are unjustly attacked, you will be in the strongest position to hold on to what you’re entitled to if you understand how the IRS moves in and out of the underground economy, and if you learn your rights.

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