The IRS is increasing the scare factor by examining more returns to try to find tax cheaters. The problem for you and us is that more good taxpayers will get caught in the snares laid by those extra auditors.Yes, Folks, there are going to be many more in the Knoxville area than there have been in the past years. The local office hired 14-yes, that’s 14- additional auditors. They have been to training school and now they are back examining tax payers. Initially, their focus is going to be individuals who have deducted auto mileage and those who have filed as a sole-proprietorship (that is a Schedule C). If you fall into one of these categories, there are certain things you need to do, which I will list in the next paragraph. For those of you who file as a partnership or as a corporation, you are not off the hook. The next phase for these auditors is to send them back to training school (probably next summer) and then start them auditing corporations and partnerships. So your time is coming.
For those of you who are using an automobile in your business, you must, according to the IRS, maintain a mileage log. This mileage log should record the total miles driven for the year and all business miles driven during the year. So there should be an entry every day stating what business you drove to, and the number of business miles driven. You must be able to show that the place you drove to is actually connected to your business and not just a personal trip. If you do not have this log, the IRS can deny the entire deduction for business mileage. If you or your employees have not been keeping a mileage log, it is imperative you start doing so now.
Basic things you should do for your sole-proprietorship are
1) Be sure to maintain a separate checking account for your personal expenses and not commingle those in your business.
2) Be sure you have a cancelled check or invoice or other supporting documentation for every business expense you deduct.
3) For any deposits into your account which are not income, be sure to keep source documentation, so you can prove to the IRS this is something other than revenue. If it is a loan, you will need loan documentation; if it is a transfer from another account, you will need to be able to show that transfer information or statement from the other account; or if it is a gift from a relative, have the check the relative gave you.
4) Keep a good set of books that show expenditures.
Although these are basic things you need to do, each business is different, and there may be additional items or precautions you need to take based on your situation. Questions? Please do not hesitate to call our office, and we will advise you as to the best course of action based upon your particular situation. Be sure to tell all your business associates about the stepped-up IRS audit effort that is going to impact all of us.