In our last post, we mentioned that many Internal Revenue Service audits of sole proprietorships involve taxpayers who, rather than intending to skirt their tax obligations, simply didn’t act carefully enough to be in full compliance with the law. Here, we wanted to continue that discussion by looking at some of these obligations.
First of all, sole proprietors are potentially responsible for paying a variety of taxes. These include, of course, income tax, self employment tax, Social Security and Medicare tax and income tax withholding, estimated tax, unemployment tax, and excise taxes. Sole proprietors must also provide information on social security and Medicare taxes and income tax withholding, and must file information returns for payments to nonemployees and transactions with other parties. At the state level, there may be other obligations.
A sole proprietor obviously needs to be aware of his or her tax obligations, keep adequate paperwork related to tax matters, and be timely about making the various filings. When mistakes are made and an audit follows, working with an experienced advocate can help a sole proprietor to navigate the investigation and effectively communicate with the IRS.
One particularly important way an advocate can help is by helping establish tax negligence when the government wants to see tax fraud. The difference is more than simply technical, since it can impact the taxpayer’s penalties. Auditors are trained to look for certain signs of negligence and fraud, but can sometimes see fraud where it doesn’t exist. We’ll look at this issue in our next post and how an experienced advocate can help.