Prevent A Visit From The IRS

Fortunately, there is a lot you can do to avoid an audit completely and remain relatively invisible to the IRS. It is imperative that you can prove all of your income and deductions.

• Any W-2s earned as an employee should match your salary and be entered on the appropriate line of your tax form.
• All income received from your daycare needs to be reported on Schedule C.
• Parents of the children in your care may also want to claim the child care tax credit. As a business owner, you do need to provide them with Form W-10 which lists your name & tax identification number. It is also prudent to provide them with the total amount they paid you for child care that year. You will want the income you report to match the child care tax credit they apply for.
• Interest and dividends reported on 1099 forms should match your earnings and be entered on your return. If you receive a 1099, you can be sure that the IRS received one as well and their computers will be looking for a match.
• Keep track of bank deposits so that all sources can be verified. As reported in a recent issue of Accounting Today, one of the first things an auditor is required to do is obtain copies of your checking, savings, and investment account statements in order to do a cash analysis and compare this to the gross income reported on your tax return. Obviously, it is beneficial for you to be able to prove that questionable deposits were from non-taxable sources such as gifts or insurance recoveries.
• Verify all calculations. Twice!
• Make sure that you complete all forms and schedules applicable to your situation. As a home daycare business operating as a sole proprietor you should have, as a minimum, a Schedule C, Form 8829 and Schedule SE in addition to your 1040 form.
• Be sure not to leave out any information.
• Sign the tax return.

Despite your efforts, if the IRS audits you and suspects you are being fraudulent with any of your claims, they can request supporting documentation for an unlimited number of years.

In general, the IRS has three years from the filing date of your tax return to audit you and request copies of key documents.

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