Part 2: Tax Tips for the Self-Employed 2014

By: Genevia Gee Fulbright, CPA, CGMA
Blog Series: Post 2 of 3

Read Post 1 of this blog series

So tax season is here.
Here are some tax season tips to turn the tax season experience into a win-win game for your self-employed clients:

  • Start early and be consistent
  • Require documentation now versus later
  • Always remember “Big Brother” is watching (trusting but re-verifying)
  • Be realistic with turnaround times
  • Educate and help clients plan

Start early and be consistent
In order to manage clients’ expectations it is critical to start contacting clients early in the season to provide checklists, create deadlines; and schedule response reminder dates, etc.

True or false: The earlier a self-employed client files his/her return the more likely they are to get audited;

False: The important deadline is the due-date, and according to IRS sources, the timing of filing does not increase chances of an audit unless they file returns late.

In general individuals who are self-employed tend to get audited more often because they typically have complex returns, generally you have an income, have more flow-through entities, and return scores are oftentimes higher when analyzed by the IRS’ Discriminant Function system (DIF) (which selects return with a higher scores based upon internally determined formulas) indicating possible discrepancies.

Require documentation now versus later
It is most prudent to obtain all required documentation when preparing the tax return now versus which questioned by the IRS. It is much easier to remember dates, find receipts, and document mileage from calendars prior to tax season.

Although in certain circumstances tax estimates are allowed, the best practices are to utilize schedules, original documents, and detailed calculations when reporting activities on tax return because one or two years later, your self-employed client may not remember certain expenses and fail to be able to put his/her hands on the documentation.

True or false: Are logs required for meals and entertainment under $75?

True: The logs self-employed clients must maintain to justify business meal and entertainment expenses can be something as simple as a spread sheet which lists the amount of the charge (prudent to maintain the receipt anyway), name of the individual(s) attending the meeting, and business purpose of the meeting. It might also be prudent to list a general topic of discussion to help you remember. Make sure you are not entertaining family or friends, unless they work specifically in the business and have a business purpose for attending.

Uncle Sam and others are watching your every move
Not trying to sound like an overly worried fan of Ray Bradbury (Fahrenheit 451) or the movie “Enemy of the State” (Will Smith and Gene Hackman) but you must remind your clients that someone is always watching you. Whether the street cameras are recording them exceeding the speed limit or passing through a toll booth; smart phone demanding them to make a U-turn as it re-routes directions; Google phone knowing their everyday whereabouts; credit card processors requirement to submit sales processed for businesses; 1099-Misc forms filed for most transactions or on-line banking and credit card activities being saved for years on-line—there is not much the IRS does not already know about you (or have the ability to find out).

Self-employed clients are targeted on occasion for audit because some activities are not yet maintained in the IRS systems completely. Therefore your clients, although trusted by the IRS, are occasionally invited to re-verify their detailed data.

Don’t forget to remind clients to maintain records and, when possible, to utilize a secure storage system to maintain backups of QuickBooks and Excel files as well as other critical records such as HUD statements, large-purchase documents, and suggest they use on-line banking, so they can maintain copies of old bank statements securely.

True or false: If you are preparing a tax return for a business client for the first time, you only need to review the last two years of returns.

False: Depending on if the client has fixed assets still on the books, carryforward losses, etc… you will want to look back as far as possible to make sure you are totally comfortable with any carryforward figures, and if invited to represent your client before the IRS or the State, you can feel totally comfortable with items on both the balance sheet and income statement (including balances from activities that occurred prior to taking over the account).

Read Post 3 of this blog series


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Genevia Gee Fulbright, CPA is President & COO of Fulbright & Fulbright, CPA, PA, 25+ year veteran tax preparer, a board director, business strategist and author of Make the Leap: Shift from Corporate Worker to Entrepreneur and Make the Leap: From Mom & Pop to Good Enough to Sell (Infinity Publishing). Fulbright has previously served as Chair of NCACPA MIC, Trustee for the AICPA Foundation and NCM Capital Investment Trust and as a Board Director of M&F Bancorp and can be reached at ggf@moneyful.com or (919) 544-0398.