Want Another Reason to Incorporate Your Business?
If you ever wondered whether or not it made sense to incorporate your sole proprietorship business, the IRS just gave you another reason. In the Taxpayer Advocate’s report to Congress this year, they revealed that the incidence of tax audits is higher among taxpayers who have unincorporated business. This is especially true when the business has to do with real estate sales or construction work. And if you live in the wrong part of the country, the chance of audit is substantially higher.
The IRS uses a formula to evaluate every tax return and give it a score. The IRS believes that the higher the score, the higher the likelihood that the taxpayer understated their tax liability. Using a Schedule C on your tax return or claiming business use of a home office are examples of things that can increase your score. Much of the information on these forms and deductions can’t be verified by the IRS without an audit so the score goes up even further.
The Associated Press recently published an article on these factors and some of the findings are, well, troubling to say the least. Here’s the full like if you’re interested: http://www.dailyfinance.com/2013/04/15/IRS-audits-south-west-tax-cheats/?ncid=webmail5.
So if you are in business (and just about everyone who’s trying to make a living is) and don’t want to be an audit risk, it’s probably time to incorporate. Most states have self-help areas on their websites if you want to do it yourself. Or contact your tax attorney or other professional for help as well. Choosing which type of entity is best for your circumstances and how to maximize the tax advantages are all areas they can help you with. But now’s the time to address it.
By: Evan A. Nielsen, Esq. (Licensed in California)