Even IRS Has A Bad Hair Day
The whole world knows CIA, FBI or even Department of Homeland Security from spy or action movies of Hollywood. Among the famous government agencies, IRS does not get much camera time. Oh wait, I remember there is a 2006 comedy Stranger Than Fiction. IRS is in it because comedian Will Ferrell plays an IRS agent who lives by exact routines every day. Dull as it is, IRS is nevertheless the powerful agency. All Americans are reminded of it every year near April 15.
State of self-employed tax
A professor in his blog said about this: About 5.4 million or 25% of all sole proprietors reported losses in 2006. 95% percent of these loss filers deducted some or all of their losses against other income, deducting a total of $40 billion.
He is saying that there were huge number of people (about 22 million) who claimed to have an incorporated business, or being self-employed, and that a quarter of them reported business losses in their income tax returns causing IRS to lose $40 billion tax revenues.
IRS got headaches
IRS estimated that 70% of these people claimed “non-compliant” expenses or deductions to some extend. That means majority of them may have written off incorrect amount or disallowed type of expenses.
IRS had a hack of time to deal with this. They tried to increase the examination, but with 25% of their agents’ time, only 1% of such cases were examined. Worse yet, such small single-person businesses had little revenue, any finding would yield very little back taxes. Not only are the examinations very cost-ineffective, but they also lack the practical and reliable ways to verify such expenses.
I am amazed by this revelation. Even IRS has a bad hair day. There are so many advices out there to tell us how to keep detailed records of expenses in case questioning from IRS. We are told to log auto mileages every time we drive for business, and record the who, what, and amount every time we dine out for business. Well it turns out, many people who stuff their tax returns with baby diapers expenses can get through.
Right ways to do it
Deduct It! Lower Your Small Business Taxes
TAX SAVVY FOR SMALL BUSINESS
Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants
Tax Deductions for Professionals
Don’t get too excited though. I am not sure IRS will let this one go. A total $40 billion tax loss is almost enough to fund the Homeland Security’s FY 2008 budget of $52 billion. For decades, IRS was unable to penetrate the secrecy of foreign banks, but it eventually cracked it, and now people are facing with tougher FBAR enforcement. With our ever increasing government budget deficits, the money man will have to find a way.
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