One of the questions we get asked most frequently is about how long documents should be kept. Here are some general guidelines based on our experience and federal statutes of limitations for income tax purposes. Your state may have longer statutes, so use this list as the guide, not the rule.
Hopefully we are past the media craze about a guest on the Dr. Phil Show. Today we need to talk about what it means to have a cash-based business.
There is nothing wrong with having a business that has a high percentage of payments coming from cash. Beauty salons and food establishments are just a couple of places where paying with cash is common. Even paying expenses in cash is fine. It's all about the documentation.
IRS concerns about scams and identity theft don't extend only to taxpayers. Criminals also impersonate IRS officials in efforts to take your money or gain your confidential tax information. Most of us have received or heard about bogus phone calls from these scammers, but sometimes they go the extra mile and show up at your doorstep.
Schedule C is an attachment to your personal tax return to report business income and expenses. Most often it is used for reporting small, side businesses, such as for a homemaker that also sells makeup, or an office worker that also does lawn care. There are no limits, though, and it can be used for much larger, full-time business activities. (I’ve seen it used for a sales business that exceeded $1 million a year in gross revenues!)
Any given individual income tax return has only a .84% chance of being audited by the IRS. That's equal to 1 return out of every 119. The odds seem pretty favorable, but those numbers are for the entire spectrum of income earners.
The There is a tax gap in the United States. Every few years the IRS does an analysis of overall compliance with federal tax laws and uses that information to estimate the annual shortfall of revenues. That shortfall is known as the tax gap, and the most recent estimate put that amount at well over $450 billion. (Yes, "B"illion.) Through enforcement efforts (like audits) the IRS typically recovers about $50 billion per year, but with a gaping difference between the shortfall and collections you can understand why they are eager to enforce where they can.
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Our blog is intended as a tool to keep people informed about relevant tax and accounting issues. If you have a question or an idea for a post, let us know!