Software Developers Group's 2009 Preliminary Schedule C Strategy

Taxpayers filing a Schedule C must report the correct gross income and all related deductions on their return. Determining the correct income and deductions is difficult when the client has a poor record keeping system or when a client tries to falsify figures to optimize the credits.

 The Working Group identified the following common income-reporting issues: 

• Questionable Schedule C income to qualify for EITC (i.e., taxpayers with no 1099)
• Questionable Schedule C losses that reduce other income and qualify taxpayers for EITC
• Schedule C income, but the taxpayers have no records for income or expenses
• Income from Schedule C businesses and claiming no expenses when it is reasonable to expect the business would have expenses

The Working Group reviewed the common issues and identified preliminary recommendations to address them. The group is continuing to develop the recommendations.

The following proposed recommendations include form changes, software enhancements and new training material:

• Add a "1099 Present" indicator to the Schedule C to improve the validation and recording of 1099 form data.
• Include an alert message for common issues such as:
  • Schedule C without expenses,
  • Schedule C income or loss that maximizes EITC,
  • Schedule C without a 1099 and
  • Expenses reported that are disproportionate to income.
• Develop training materials regarding Schedule C. for preparer faced with the challenge of determining if the taxpayer is engaged in a legitimate business. The group is considering suggesting the use of Forms 11652, Questionnaire and Supporting Documentation which is used in Schedule C EITC examinations as the basis
• Links to the Preparer Toolkit website.
• Develop a training document to address the issue of assisting taxpayers with reconstructing income and expenses.

Last updated: 7/10/10