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The key to avoiding an audit appears to lie in being inconspicuous. Some factors are of course beyond your control. The more you make, for instance, the more likely you are to be audited. The IRS has also shown a statistical probability that those who are self-employed are more likely to misstate income and deductions than those with salaries. You probably don’t want to purposely make less or change your business in order to avoid an audit. But below are listed some IRS red flags on which you can have an affect.
The first category is one especially important to MLM business people and direct sellers- business expenses. IRS tax examiners refer to deductions for home offices, business travel, and entertainment, and business use of an automobile as the “kiss of death.” Because they are often abused the IRS gives them closer-than-usual scrutiny, and requires strict documentation. The IRS often challenges these deductions knowing that many people do not keep the proper records and will not be able to defend their claims. The obvious solution for the taxpayer claiming these deductions is to carefully document the expenses.
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- Network marketing has been recognized as an important industry by the IRS.
- In 1982, the IRS specifically recognized the independent contractor status of direct sellers.
- The IRS specifically addresses the issues of network marketers in Small Business Tax Guide located at MLM Legal.
- One in ten thousand households in the United States has a direct seller.
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Seven reasons why network marketing offers a unique business opportunity:
1. It is low cost to start a business with minimal initial investment and overhead costs. Some companies charge as little as $20-$30 dollars to get started.
2. You can work part-time or full-time to make supplemental income or limitless earnings. The more you work, the more you’ll make. The amount of your income is completely up to you.
3. There is high income potential without years of experience or an expensive college degree. Direct selling companies don’t usually require experience of any kind. Therefore, there is no college degree or lengthy resume necessary.
4. You can have independence while still benefiting from a full network of support. Distributors can benefit from the support they receive from their sponsor and the company’s training programs.
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Distributors can save money on taxes by hiring their children and spouses. By hiring your children you can deduct their salary as a business expense and, because the child is employed by his or her parent, you’re not responsible for withholding social security and federal unemployment tax on the child’s wages.
Here are some limitations to this arrangment:
1. The salary must be reasonable to the child’s age and work performed. For example, you wouldn’t pay your seven year old $30 an hour.
2. The work performed must be necessary and required service to your business operations. No lawn mowing or dish washing.
3. The child must actually perform the work.
4. Document the hours and tasks your child performs in case you are even audited.
5. An actual payment must be made to the child, preferably from your business account. Be sure to check specifics with your tax adviser.
Here is a list of some very popular and highly-regarded books about multi-level marketing, direct selling, and network marketing, written by leading MLM attorney Jeffrey Babener:
Network Marketing: What you should know
A brief overview of the table of contents include:
An Overview of an Exciting Industry
An Introduction to Network Marketing
Why Millions of People are Getting Involved
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