Best Business Practices for Photographers [104]
If you're wondering how you came to be audited, for the most part that remains a huge mystery. However, many examinations result from arithmetic mistakes. When your return is first received, it is transcribed and checked for math mistakes. A second transcriber does the same work to double-check the first. Following that, your data is sent to the National Computer Center, and there, statistical models review your entries to see whether you may be a good candidate for an audit. Of all non-business (in other words, individual) tax returns, the National Computer Center sends to each of the regional offices approximately 10 percent of returns. At that point, an actual person looks at your return. Almost all of the returns are weeded out, and between one-half and one percent of these are chosen to be examined.
A 2005 through 2009 strategic plan presented by the IRS sets forth expectations and obligations: "In the United States, the Congress passes tax laws and requires taxpayers to comply. The taxpayer's role is to understand and meet his or her tax obligations. Our role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share." This points out something you must remain clear on: "The taxpayer's role is to understand and meet his or her tax obligations." There is no, "Oh, I didn't know…" or "I don't think that is fair" excuses. If it's the law, comply with the law, or contact your elected officials and work to get the law changed.
The same document puts forth their mission statement:
"Provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."
If you are curious about your own tax history, including dates the IRS shows you paid taxes, made quarterly payments, filed your returns, and so on, you can get that transcript of activity, or Master File Transcript (MFTRA). For those of you who are listed as a business, be sure to get your Business Master File, or BMF. A phone call to the IRS at (800) 829-1040 will get the process started for you. This document is very helpful for you because if there is an error or a payment that wasn't properly credited to you, you'll want to clear that up.
Of the more than 8,500 pages of tax code, the vast majority does not apply to you. However, deciphering what does and does not is the purview of trained tax professionals. There is one thing you need to understand, though. While you are obligated to self-assess your tax liability and to pay your taxes, unless you earned less than the annual minimum income amount, not paying your tax obligations is not an option.
In the Crosshairs
The difference between what you owe and what you pay is referred to as the tax gap. For self-employed people, you are square in the crosshairs. In the book Taxing Ourselves: A Citizen's Guide to the Debate over Taxes (MIT Press, 2008), it is reported:
About two-thirds of all underreporting of income happens on the individual income tax. Of that, business income—as opposed to wages or investment income—accounts for about two-thirds… In a recent survey, 96 percent of people mostly or completely agreed that "it is every American's civic duty to pay their fair share of taxes"; but also 62 percent said that "fear of an audit" had a great deal or somewhat of an influence on whether they report and pay their taxes "honestly."
In a New York Times article from March of 2009—"Let's Talk About Tax Cheating: A Freakonomics Quorum," by Stephen J. Dubner—Peggy Richardson, who was the IRS Commissioner from 1993 through 1997, wrote, "Probably the most pervasive forms of 'tax cheating' are not the large tax-shelter scams that have garnered headlines in recent years, but less 'sexy' and more mundane forms of 'cheating,' such as underreporting of income and claiming excessive deductions by large numbers of taxpayers. For example, people who are self-employed often