Wednesday's tax tip Vol. 19 - Sole Proprietors

I've read numerous articles surrounding increased audits of sole proprietorships.

Because the IRS believes that this is where most of the under reporting of tax exists, they are intensifying their efforts on those businesses. I've read and I know from my own personal experience on audits, the IRS is primarily focusing in on receipts not reported as income.

How do they check this?

In my audit it was as simple as taking all my bank statements and adding up all the deposits. I needed (and fortunately for me, was able) to document any bank deposits that went into my business accounts that were not sales.

So if you transfer lots of funds between accounts or borrow money from lines of credit of over draft protection accounts, you need to be able to reconcile those transfers above and beyond sales receipts.

While on it's face it makes sense for the IRS to hone in on this type of activity, it occurs to me that there is a huge amount of business activity that is never reported on any tax return. I would guess that there are tens of thousands of businesses that never report any income because they work "under the table". No 1099's have been issued and as a result, there is nothing to tip off the IRS as to the reporting of any income.

This is becoming a larger and larger issue with illegal immigrants and citizens avoiding child support or paying any tax all together. But we'll let the IRS deal with those issues.