Solopreneurs, from independent contractors to sole practitioners, file Schedule C with their personal Form 1040 to report income and expenses from their business. As a result of the efforts of the National Research Program (NRP), an arm of the IRS that collects data used to measure tax payment, filing and reporting compliance, the IRS estimates that $68 billion of the annual $345 billion tax gap for 2001 (the spread between what the government should collect and what it actually collected) was due to sole proprietors. This group of taxpayers underreported their income by 57 percent. The other part of the tax gap from this group came from overstating deductions as well as some who did not file any returns.

Claudia Hill, the owner and principal of Tax Mam Inc. in Cupertino, Calif., editor-in-chief of CCH’s “Journal of Tax Practice & Procedure,” and former member of the Commissioner’s Advisory Group to the National Office of the Internal Revenue Service, has put together a list of key audit issues for Schedule C filers that have emerged following the IRS’s focus on the tax gap. The list was created through her practice, experience, surveys of practitioners and discussions with the IRS. The list reflects Fact Sheet Series on the tax gap issued by the IRS each month from June 2006 through September 2008.

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