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Still Don’t Want to Incorporate?

August 30th, 2009 · 5 Comments

In a recent blog post titled 5 Reasons to Incorporate (in Addition to my Fees) I said the following:

IRS statistics show that it audits Schedule C businesses much more frequently than it does S Corporations and LLCs. This reason alone is sufficient to justify the additional costs and paperwork associated with forming a separate legal entity and filing its annual report and tax return.

The IRS website dedicates an entire section to taxpayer abuse.

One of the fraudulent tactics it has identified is the use of form Schedule C (business return of a sole proprietor) to take fraudulent deductions.

The IRS does not list fraudulent deductions on corporate or LLC returns as common tactic of abusive tax preparers.**

Naturally, this means that the IRS scrutinizes Schedule C returns more closely than it does businesses that report their profits and losses on forms 1120 or 1120S.

** The IRS lists Schedule E supplemental losses as a common abuse tactic; however, I believe it does so because abusive tax preparers use that form to report fraudulent or excessive rental losses.

Here’s the complete IRS list:

Tactics Used by Dishonest Abusive Return Preparers
 
Dishonest return preparers use a variety of methods to formulate fraudulent and illegal deductions for reducing taxable income. These include, but are not limited to, the following:

  • Preparing fraudulent Schedule C, Profit or Loss from Business, claiming deductions for expenses that have not been paid by the taxpayer to offset Form 1099, Miscellaneous Income, or income earned from outside employment,
  • Including false and inflated itemized deductions on Schedule A, Itemized Deductions, for:
    • charitable contributions 
    • medical and dental expenses 
  • Claiming false Schedule E, Supplemental Income and Loss, losses 
  • Claiming false dependents
  

Tags: Corporate Tax

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