WebCPA reports that the IRS is thinking about limiting the loss deductions of sole-proprietorships:
About a quarter of all sole-proprietor businesses report losses on their tax returns, but many are doing so by understating their income or overstating their expenses, leading to billions of dollars in lost tax revenue, according to a new government report.
The Government Accountability Office said in the report that about 5.4 million, or 25 percent, of all sole proprietors reported losses in 2006. Ninety-five percent of these filers deducted some or all of their losses against other income, deducting a total of $40 billion.
According to the IRS’s most recent estimate, in 2001, 70 percent of the sole-proprietor tax returns that reported losses had losses that were either fully or partially noncompliant with tax laws. About 53 percent of aggregate dollar losses reported in 2001 were noncompliant. Sole proprietors underreported their net income by 57 percent, or $68 billion, for 2001.
This is just one of the many reasons I recommend that my self-employed, small business clients either incorporate their businesses or operate them as LLC’s (filing as an S corporation).
The woeful tax compliance record of unincorporated small businesses means the IRS scrutinizes the returns of Schedule “C” filers much more closely than it does the returns of corporations and LLCs:
The IRS agreed to conduct research to determine the percentage of sole-proprietor returns in the total population that report activities not engaged in for profit and quantify the extent of noncompliance among those returns. The IRS also plans to capture and analyze similar information from its ongoing compliance programs.
And listen to IRS Deputy Commissioner Linda Stiff:
“We agree that addressing noncompliance among sole proprietors is important because they are responsible for a large portion of the tax gap.”
Small businesses of the world, incorporate!
Related Posts:
- Still Don’t Want to Incorporate?
- 5 Reasons to Incorporate (in Addition to My Fees)
- 5 Slam Dunk IRS Audit Red Flags
12 responses so far ↓
1 Kristin @ klingtocash // Oct 15, 2009 at 9:18 pm
The IRS does not directly come out an say that you are more likely to get audited as a non-LLC sole proprietorship. More LLC’s file schedule C’s. With the minuscule percentage of 1040 audits, even those with schedule C’s and the increase in S Corp compliance audits, I’m not sure it’s worth the hassle of setting up an S Corp LLC to avoid audit. Every CPE seminar I’ve attended in the last two years has warned us about an uptick in S Corp audits.
2 Peter // Oct 15, 2009 at 10:32 pm
Kristin,
Thanks for visiting.
I think Deputy Commissioner Stiff’s statement that the IRS is specifically addressing the noncompliance of sole-proprietorships qualifies as a direct statement of the IRS’s intent to audit Schedule C’s more frequently.
And reduced audit exposure is just one of many good reasons to incorporate.
3 IRS May Limit Deductibility of Schedule C Losses: Incorporate People! // Nov 17, 2009 at 10:15 am
[...] [...]
4 Obama has Been Great for My Tax Practice // Jan 26, 2010 at 6:58 pm
[...] Schedule C Businesses Under IRS Attack [...]
5 jp // Jan 28, 2010 at 10:43 am
Undergoing an audit now, you are assumed guilty, you must prove your innocence. Don’t let anybody kid you It is an all out attack on small business
6 Peter // Jan 28, 2010 at 11:27 am
jp,
I’m not sure it’s as bad as all that.
First, speaking in terms of “guilt’ and “innocence” is inappropriate in this context. An IRS audit is a purely civil matter. Second, since compliance is “voluntary” the taxpayer is responsible for telling the government what his true tax liability is. That means, of course, that the taxpayer, should he be audited, must show the IRS how he arrived at the numbers he himself put on his tax return.
Hardly an unreasonable or onerous requirement,
7 IRS Targets Schedule C Filers // Apr 12, 2010 at 6:28 pm
[...] Schedule C Business Under IRS Attack [...]
8 Edward Strange // Oct 26, 2010 at 10:55 pm
Would like to know the percntage of audits of small business and self-employed in a region and the race, income of the business, and number of times of an audit to a small business per year/self-employed business state by state. GA for instance.
Who is the Director, what is his views, when was he appointed and who appointed him?
9 Edward Strange // Oct 26, 2010 at 11:00 pm
Will be requesting this information under the Freedom of Information Act.
It is being said that small business is the backbone of American Economy but the IRS is on a attack of Small Business.
Do you agree or disagree?
10 Don’t Blame Me, I Told you to Incorporate. // Nov 1, 2010 at 8:49 pm
[...] Schedule C Business Under IRS Attack [...]
11 Advice to Would-Be Schedule C Filers: “DON’T” // Nov 9, 2010 at 11:12 am
[...] Schedule C Businesses Under IRS Attack [...]
12 Lisa // Jun 4, 2011 at 2:04 am
Hmmm, if you keep pressurizing businesses, they may as well move to another country and so your economy will lose even more.
Leave a Comment