Are you looking for a way to save money? The Earned Income Tax Credit on your Schedule C helps low income workers.
There are millions of unincorporated businesses across the US. Many of these unincorporated business owners file a Schedule C on their personal tax return rather than a separate corporate tax return. There are benefits to keeping their tax filing requirements simple but there is also a near certainty that if you have a small business and you also are eligible for the Earned Income Tax Credit or Earned Income Credit (EITC), you will be audited. Here’s why.
How Does EITC Help the Low Income Worker to Save Money?
The EITC is a generous credit available to low income workers. The maximum Earned Income Tax Credit available for 2017 is $6,318. The value of money can be quite relative; especially when you make about $50k per year, a $6k credit is six weeks of income. However, it is possible for Schedule C filers to ‘cherry pick’ their income in order to maximize their EITC. Taxpayers can do this by inflating or under reporting either their income or expenses or both. This of course is illegal but it happens nonetheless. Some of this is careless bookkeeping in order to save money, some of this is from prompting by unscrupulous preparers, and some of this is just plain fraudulent.
The IRS Wants to Take Money From the Low Income Worker
In any case, the IRS is trying to plug this leak. Why would the IRS take money from the low income? Well, if you receive EITC and you have Schedule C income, you should expect an audit. Just a side note here, an audit will not save money for you. And, in many cases, the IRS will request that your state conduct the audit as in the case below from Mass DOR:
How do I get ready for an audit?
In these cases, I prefer to prepare my clients for the audit ahead of time and have the documentation ready for the inevitable. The ‘envelope method’ of accounting works wonders in this case. Suppose you have $500 of ‘Supplies’ for your business. Take an envelope, stuff all of your ‘supplies’ receipts in the envelope and when you are preparing your taxes, make a copy of all of the receipts with an adding tape attached to the front of the envelope and then make a copy of the cover of the envelope. Often times you will also need copies of the Social Security Cards for all persons listed on the tax returns and copies of your W-2s if applicable.
I have a home office, how do I avoid an audit?
Well, you can’t really avoid an audit, but you can win an audit. The tricky stuff comes into play when you are claiming a home office expense and business mileage. You need to keep a mileage log or you risk having a big tax problem. Last year taxpayers were able to deduct 54 cents per mile. This is an area where many taxpayers get sloppy. You can buy a mileage log at most office supply stores for about $10.
One important factor is that if you plan to deduct your actual expenses instead of the standard mileage rate, you still need to keep track of your business miles. IRS Pub 463 has a comprehensive list of rules & recordkeeping requirements.
The bottom line is you need to keep accurate records, and Worthtax can help you with an audit. Like I said above, I like to help my clients have all their paperwork in order BEFORE the IRS comes knocking at your door.
|Package of large envelopes:||$ 5|
|Price of a printing calculator:||$20|
|WINNING AN AUDIT:||PRICELESS|
Are you afraid that you will be audited?
The earned income credit can be a means to save money. However, are you afraid that you will be audited or are you trying to get your taxes done on an extention? Give me, Alex Franch, BS EA a call at 781.849.7200. I’ll help you avoid the fear factor of an audit, and help you to put more money in your pocket. Maybe you filed your tax return but something just didn’t feel right to you. If you have questions about your own tax return I am available to look it over for you to make sure that you took all that you were entitled to and didn’t take what you should not have.
Sources and Resources
- Earned Income Tax Credit: Do Not Miss Out
- IRS Takes Action on Tax Credits
- Do I Have to File a Tax Return?
- Find Unclaimed Money
- Unclaimed Refund: Are You Leaving Tax Money On The Table?