IRS to Increase Audits of Self-Employed's

If you are self-employed; beware!

The Internal Revenue Service plans to increase audits of the self-employed by checking for unreported or understated income during correspondence audits.

Estimates by the IRS show that at least $68 billion of the tax gap (tax gap is defined as the difference between what the IRS estimates should have been collected in taxes and what was actually received; the gap was estimated at $345 billion in 2001) was due to self-employeds not filing or not accurately reporting revenues and expenses. The IRS conducted over 5 million correspondence examinations during the past 5 years that resulted in about $35 billion in additional taxes. For each self-employed tax return examined about $6,800 in additional taxes resulted. With the federal deficit increasing at rates never seen before, the collection of these taxes on unreported income and/or overstated expenses has become critical.

Current IRS procedures for correspondence audits of self-employeds do not require IRS examiners to complete minimum checks unreported income. It has been recommended that the IRS require correspondence examiners to check for unfiled returns and to probe for unreported income. These checks are required of IRS examiners who conduct in-person and office visit audits, but not of correspondence audits.

"Sole proprietors who underreport their income can create an unfair burden on honest taxpayers and diminish the public's respect for the tax system," said Treasury Inspector General J. Russell George in a statement. "It is imperative that the IRS institutes policies to address this problem."

In response, the IRS agreed to develop “selection filters” to identity and refer to IRS examiners those self-employeds who did not file required returns or have indicators of unreported income or overstated expenses.

Should you have any questions or concerns, or wish to file an amended tax return, please contact me.

Reg Baker, CPA PFS has over 20 years experience and can be contacted via email at reg@regbaker.com or through his Website at http://www.regbaker.com/.