Do you have clients with many deductible losses… clients of the Schedule C variety? The IRS has got their eye on them. You can pretty much consider it target locked.
Have you communicated this important piece of information to your sole proprietors out there yet? If not, you should. The IRS is beginning to target Schedule C taxpayers, a little more heavily – particularly in record keeping areas and for an economic reality test for deductible losses. As a tax preparer you should be a little proactive when it comes to Schedule C (or any client prone to an IRS Audit).
Here are a few things to consider coaching them to do this year to prevent an audit and to be prepared for an audit if one should occur.
Record Keeping
When you’re running the show as a sole proprietor – it generally means just that. Sole. Solo. El numbero uno. Many sole proprietors find it hard to keep up with records, receipts, mileage logs, etc. These documents (or lack there of) are what the IRS is looking for.
Coach your clients about the importance of record keeping and remind them regularly about it. Sure, you don’t want to be a nag but you also don’t’ want to be unprepared if an IRS letter comes.
These days there are apps for tracking mileage and recording expenses that make keeping track of receipts and mileage easier. They could also do it old school and keep a planner with them at all times to staple receipts and jot down mileage or expenses to. Whatever works as long as it’s done!
Deductions
If your client ends us taking a loss due to a large number of deductions, the deductions you report as a tax preparer need to be well documented. The IRS will be looking to ensure these are legitimate expense deductions.
This is why your client needs to keep records and receipts – and not in a paper bag they hand you during tax season.
Unreported Cash Transactions
In the event of an audit, the auditor is very likely to perform a bank deposit analysis. That is one reason a taxpayer should have a separate bank account for the business, and only deposit income for the business and pay legitimate business expenses from the business account. Unexplained deposits are often the basis for an examiner to claim unreported income. Of course, such deposits could be perfectly legitimate, such as proceeds from business loans, gifts, insurance proceeds, etc.
Communicating with clients is the best way to be proactive about potential tax issues. Regular communication with clients throughout the year help remind them of important dates, deadlines and habits to keep and helps you both prepare for the upcoming season. It’s also just good customer service.
More Great Reads:
Expanding Your Target Market with Continuing Education