Schedule C is the form that unincorporated sole proprietor businesses use to report their income and expenses as part of their individual tax returns. Schedule Cs have been center stage in recent IRS “tax gap” estimates.
The tax gap is defined as the amount of tax liability faced by taxpayers that is not paid on time. This past January they released the tax gap figures for 2006. You might say that 2006 was quite a ways back, but you have to remember returns are filed in the subsequent year and then the information must be compiled and analyzed. Thus, most Treasury reports based on filed tax returns are based on information from several years back.
The 2006 report essentially mirrors the 2001 report, except the tax gap has increased from $345 billion to $450 billion. Of that $450 billion, approximately $372 billion is attributed to underreporting in the following categories:
Non-business underreporting 73
Schedule C underreporting 193
Overstated deductions, exemptions & credits 42
Payroll taxes 20
Corporate income tax 39
Estate tax 5
Since Schedule C underreporting represents the largest category, and over half of the underreporting, it is no wonder that the audit rate for Schedule C returns has increased substantially and is among the highest of the rates. Based on 2010 IRS figures, Schedule Cs have a 300% higher chance of being audited than either a partnership or an S-Corporation. Of the Schedule Cs audited in 2010, the average adjustment exceeded $9,000.
Among the areas of underreporting are:
If you have questions related to your Schedule C or any of the issues in this newsletter, please give this office a call.
Donna Bordeaux, CPA with Calculated Moves
Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.