Schedule C

1. The MSSP Audit Guide for passive activity states that, "the following principal industrial activity codes on Schedule C indicate that a passive loss issue should be considered":

SIC Codes:

7773 Equipment Rental
7922 Computer Rental
8813 Auto Rentals

If your Schedule C includes any of these businesses, be prepared for an audit.

2. If your method of accounting box is checked as a cash basis taxpayer and you have had bad debts as an expense, watch out. Many people have return bad checks and list the returned checks as a bad debt. Change your policy and list the returned checks as return and allowances. This could avoid an audit.

3. Multi-level sales, such as Amway, are a target for IRS. Just make sure that you are in the business for a profit and be able to show that the business can make a profit. IRS is treating multi-level sales expense as personal or hobby and not deductible.

New Audit Selection Method

There is a new audit method being developed at the IRS District Office by the District Director. The Director will select special areas to audit. For example, returns with contribution in excess of a certain precentage of your income such as 10% are a good candidate for audit.

Let's watch this method over the next few months and see how IRS selects its target.

Applying For a Loan

IRS has a program which allows a financial institution considering a loan to FAX a copy of the applicant's tax return. Within 4 hours IRS will respond with a verification as to the accuracy. Should the two documents not agree, either IRS or the FBI will schedule a visit.

This method is in a test program. The self-employed individuals should make sure that the documents given to a bank are the same documents given to IRS.

Farmers & Cattle Auction Barn

IRS believes that farmers and the cattle auction barn have devised schemes that allow underreporting of cattle sales. A special audit guideline has been issued.

New IRS Audit Initiatives

Collection Problems

Audits - Travel & Entertainment

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