Navigating IRS Audits for the Self-Employed: A Guide by Merrick Law Firm LLC

At Merrick Law Firm LLC, we understand that the Internal Revenue Service (IRS) often views self-employed individuals through a magnifying glass due to a higher incidence of tax discrepancies found within this group. Indeed, the likelihood of an audit is more significant for the self-employed compared to traditional wage earners. To protect yourself and your enterprise, it is critical to adhere to these fundamental practices: accurately report all sources of income and refrain from claiming false deductions.

Should you find yourself in the unfortunate situation of facing an IRS audit—or more severely, a criminal investigation—it's important to be aware that the IRS has the authority to scrutinize your financial statements. Unreported income that appears within your bank accounts can serve as a red flag to IRS auditors.

As a self-employed individual under the lens of an IRS inquiry, expect the following questions and areas to be examined:

• Have you accounted for all business revenues and receipts in your reports?
• Does your lifestyle suggest an income exceeding what you’ve declared from self-employment?
• Are all cash dealings, particularly those of a high value, accurately documented?
• Have you tried to claim any personal expenses as business or home office write-offs?
• Are there car expenses claimed that weren’t incurred for business purposes?
• Have you reported considerable business entertainment expenditures?
• Are you up-to-date on making proper payroll tax deposits?
• Are your employees classified accurately, rather than as independent contractors to skirt employment taxes?

For those with employees, we at Merrick Law Firm LLC stress the necessity of maintaining punctuality with federal payroll tax deposits. Misappropriating withheld tax funds is a severe infraction. Late payments can result in hefty fines and interest charges, signaling that the business functions could be unsustainable.

A reliable method to ensure timely payroll taxes is to engage the services of a bonded payroll tax service. Many financial institutions and payroll service companies offer these services affordably with the assurance to cover penalties for any delinquency on their part.

The federal government has mandated that cash transactions or equivalents exceeding a certain amount must be reported to the IRS using Form 8300, recognized as Currency Transaction Reports. The aim is to combat the shadow economy and impede money laundering related to narcotics (refer to IRS Publication 1544 for comprehensive guidelines). Non-compliance can lead to significant penalties, audits, or worse, criminal investigations by the IRS Criminal Investigation Division. State tax authorities may have equivalent stipulations.

If your business predominantly operates with cash, such as bars, restaurants, vending operations, or laundry services, the IRS might speculate on underreported earnings. The audit risk for cash-intensive businesses is notably higher, regardless of Form 8300 filing.

Given the evolving nature of laws, Merrick Law Firm LLC advises consulting with our experienced attorneys to understand the latest legal implications for your circumstances. For further assistance or to discuss your particular situation, please contact Merrick Law Firm LLC at (312) 269-0200. Our team is ready to provide you with guidance and support throughout any tax-related challenges.