Here is more evidence (as if we needed it) that supports the soundness of our recommendation that small business owners should incorporate or form an LLC rather than operate as a sole proprietorship.
Back in October we reported that the IRS is considering placing limits on the amount of Schedule C (return of a sole proprietorship) losses taxpayers may deduct against other income because of rampant non-compliance.
WebCPA has more:
About a quarter of all sole-proprietor businesses report losses on their tax returns, but many are doing so by understating their income or overstating their expenses, leading to billions of dollars in lost tax revenue, according to a new government report.
The Government Accountability Office said that about 5.4 million, or 25 percent, of all sole proprietors reported losses in 2006. Ninety-five percent deducted some or all of their losses against other income, deducting a total of $40 billion.
According to the IRS’s most recent estimate, in 2001, 70 percent of sole-proprietor returns that reported losses had losses that were either fully or partially noncompliant with tax laws. About 53 percent of aggregate dollar losses reported in 2001 were noncompliant.
Sole proprietors under-reported their net income by 57 percent, or $68 billion, for 2001.
To all but the morbidly insane and the militantly deluded these disturbing statistics mean that the IRS scrutinizes small businesses that report the results of their operations on forms Schedule C much more closely than it does small businesses that report operations on corporation returns.
Assuming you are not a masochist, you will never want to file a return that will result in heightened IRS scrutiny.
Schedule C compliance is so bad that the IRS is considering implementing a radical plan to combat it:
One approach for limiting sole-proprietor loss noncompliance would impose a rule that limits losses that could be deducted from other income. The Tax Code has a number of such limitations, the GAO noted.
Add reduced IRS scrutiny to the many other benefits of doing business in the corporate or LLC form and you have what we in the business like to call a “no-brainer.”
On the other hand, you might save a few hundred dollars if you don’t incorporate.
Related Posts:
- 5 Slam Dunk IRS Audit Red Flags
- 5 Reasons to Incorporate (in Addition to My Fees)
- Still Don’t Want to Incorporate?
- 59 Tips for the Self-Employed
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1 IRS Targets Schedule C Filers // Apr 12, 2010 at 6:22 pm
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