Ways Through the Maze: A Tax Guide for Indies

Welcoming eLetter
April  2009
June Walker
Consultant to Indies

June's Blog
June's Book 
Self-employed Tax Solutions 

Tax Solutions for Creatives

Tax Solutions for Creatives: An Audio CD
Basics for the Visual Artist
An Audio CD
June Walker

1. Introduction
2. Self-employed in Business 
3. Three Ways to Deductions
4. Expenses in General
5. Office-in-the-Home
6. Auto & Transportation
7. Travel or Transportation
8. Meals & Entertainment
9. Income
10. Taxes  
11. Recordkeeping
12. A Final Caution

The What of Ways Through the Maze

Will bring you simple solutions to complicated situations about:

Indie pensions
Being self-employed

The Why of Ways Through the Maze

To guide indies to a more simple and secure tax life. 

To promote indie-business self-confidence.  

To humanize tax issues with glimpses into the lives and concerns of self-employed people. 

Each issue will include one or more Q&As that come out of real-life situations of indies who have visited my blog or my website. 

From time to time I'll also announce indie happenings of interest to you.

If you'd like to receive Ways Through the Maze
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Welcome to The Maze
Welcome Indie or Indie-to-be,
Thank you for your recent visit to my website and/or blog.

If you are one of the visitors who has sent in a question and is still awaiting an answer, please know that I receive hundreds of questions and respond to as many as time permits. Yours may still be in the hopper.
In addition to my website and blog my eLetter, Ways Through the Maze, goes out to indies once a month. Each eLetter spotlights a question or two that other indies in search of help have sent to me. The Q&As are from real indies, about real situations, and offer real solutions. 
My goal is to present useful, easy-to-understand, tax-saving information that will give independent professionals the confidence to walk assuredly through the indie-business maze.
Below is a representative Q&A. Please take a look at the Maze Archives to see what's come before. 

The Maze is emailed on the third Thursday of every month. Every once in a while I also send an announcement pertinent to indies.
If you think this kind of info will be useful to you then The Maze will continue to arrive.  If not, please choose the unsubscribe at the top or bottom of this eLetter.
Wishing you success in your indie venture,
June Walker
Dad is Wrong. Don't Cheat
Hey June!

I am a professional ballet dancer and teacher. This is my first year as an indie.

My question for you has to do with audits. Since I get 1099s that my employer fills out, what should I do if they are wrong (i.e. too short)? I asked my dad and he said not to worry because if I get audited they can only go by the 1099 and whatever amount is written on there. But I worry because that almost sounds too good to be true. If I get audited, is there any way that they can prove I made more money than my 1099 states? Help!!! AM I being too paranoid?

Fayetteville, GA

Well, Tiffany, Dad is wrong.

Hiding income is fraud. You are breaking the law if you do not claim all your income.

Hiding income does not give a positive, professional image of your business. It raises questions, such as whether you are a legitimate business. Do you want to be looked upon with respect in your business community?

There are several ways for the IRS to verify income. In an audit of an indie, the IRS does not simply look at 1099s. Every bank statement is reviewed and must match income. If the money coming in on the statements doesn't match the income on your tax return you must be able to explain why. If your lifestyle is Porsche but your income is Hyundai, then the IRS digs deeper.

Let's say that Dana's Dance school hired you to teach and Dana's bookkeeper incorrectly completed your 1099 with $500 income instead of $5,000. Dana would claim as an expense of her business the full $5,000 paid to you. Were she audited she would prove her $5,000 expense not by the incorrect 1099 but with the checks she paid you or by matching fees from her students with your teaching schedule.

If the enterprising IRS auditor decided to check your return and found only $500 claimed as income you'd be in trouble. Is Dad going to pay your penalties and interest for you?

I say in my book, Self-employed Tax Solutions : The IRS is not a morality agency, it is a monetary agency. It doesn't care what you do for a living as long as you pay taxes on the income you make doing it. If you make your living as a hit man or a lady of the night or a drug dealer, be sure to pay the IRS its fair share. Remember the Chicago mobster, AI Capone? He wasn't sent to prison for murder, bootlegging or racketeering; he was convicted of tax evasion for not reporting the money he earned in his self-employed endeavors.

When the IRS calls for an audit its only purpose is to collect more tax money with some interest and penalty to boot. Criminal activity is not suspected. But if you are caught in outright cheating -- particularly in deliberately failing to report a significant amount of income -- the IRS will not hesitate to prosecute you.

If you are ever audited, and the IRS refuses to accept some of your deductions, you will have to pay the additional tax on the lost deductions and interest on that additional tax amount. You also may have to pay a late payment penalty of up to 25% of the tax owed. You'll be out some money, but you've simply had a legitimate disagreement with the IRS about a deduction, you will not be hit with criminal charges or fraud penalties.

A fraud penalty can be as high as 75% of the tax owed. That is in addition to the tax owed plus interest.

You might want to read this post 1099 Forms and the Unpaid Taxes for more info.

I think you'd better have a talk with Dad. Or maybe buy him my book for his birthday.


PS: The people who pay you are not your employers. Only employees have employers. Employees receive W-2s not 1099s.