You probably do your best to remain inconspicuous, which is a good thing. But some factors are beyond your control. It’s a fact. The more money you make, the more likely you’ll be audited. Those who are self-employed, like network marketers, have a higher statistical probability of misstating their income and deductions compared to salaried individuals. Of course you’re not going to limit your income or change your business plan in order to decrease the chances of being audited! So we’ve decided to put together a target list of 13 [unlucky] red flags that spark interest from the IRS.

1. Business expenses are especially important to direct sellers. Did you know that IRS examiners often refer to home office, business travel, entertainment, and business use of an automobile deductions as the kiss of death? Why is this? Well, these particular deductions are often abused and the IRS knows to scrutinize them closely. Keep strict documentation and proper records and be ready to defend your claims!
2. Charitable contributions and casualty and theft losses. Taxpayers who donate property to charities, and taxpayers who have had property stolen or destroyed tend to overvalue it for tax purposes. The best defense to an IRS challenge is to get independent appraisal of higher-priced donated items.
3. Bad debts. To claim a debt loss you must show that the debt was legal obligation, such as a contract or loan note, and that

   you have tried to collect the debt. This is a suspicious deduction because many people try to claim debts of friends and relatives without satisfying the requirements.

4. Hobby losses. Any losses related to activities that appear to be more pleasure than business will attract extra IRS attention.
5. IRS blacklisted preparers. Make sure you hire an honest tax preparer. What more can we say?
6. Income from a barter-related activity. Although no money is exchanged in the bartering process, the IRS still considers it taxable.
7. Comparative size of deductions to each other. An item that is large in proportion to other deductions will draw more scrutiny.
8. Absolute size. A huge deduction, regardless of the accompanying deductions or the income shown on the return, will require a closer study.
9. Out of character deductions. If you claim a deduction that is “out of character” with the rest of the situation presented on your return, you are more likely to be audited. For instance, if you’re selling local products and are claiming extensive airfare deductions, it might raise some suspicions.
10. Mistakes, missing information, or incomplete forms also draws attention. If it seems to be a mistake, the IRS is likely to suspect you of trying to mislead them. Make sure to fill in all the blanks the forms require, even if it’s with a “0,” a “no,” or “not applicable.”
11. Misfits. Attempts to fit certain items into categories where they do not belong, in order to take advantage of more favorable provisions, will cause suspicion.
12. Linked items. If you claim one deduction, but do not claim another closely related one, the IRS will wonder why. For instance, deductions for property tax and mortgage interest are usually found together (unless your mortgage is completely paid). If one is claimed but not the other, the IRS is likely to notice.
13. Comparative to income and geographic area: If you claim more or larger deductions than other taxpayers in the general area with similar incomes, again, the IRS will wonder why and take a closer look.

The fact that these are red flag, target areas is not to say that the deductions are not perfectly legitimate. As long as you can substantiate your deductions, you should not hesitate to claim your deductions. What this target list indicates; however, is that companies and distributors involved in MLM activity should carefully document and support their deductions, write-offs, and business expenses.

And because multilevel marketers are home-oriented and social network-oriented in their businesses, many of their red flag deductions really are expenses; where for the average taxpayer, these types of deductions are usually personal and non-deductible.

If you want to be extra careful and possibly head off confrontation with the IRS, include explanations of any unusual items with your return. If the IRS system flags your return, perhaps an explanation may satisfy the IRS reviewer? It’s worth a shot!

We at MLM Legal wish all the network marketers, party planners, and direct sellers a happy and fruitful tax season!

Why stop here? Learn more about running your own MLM business by watching Attorney Jeff Babener’s videos!

How Do I Raise Capital to Start My MLM Business?

How Much Does It Cost to Start a MLM Company?

Visit us at www.mlmlegal.com to learn more.

No one starts at the top and it is the rare company that starts with millions of dollars. It is not unusual to see MLM startup companies spend hundreds of thousands, this just may not be possible for many startups with a dream. The fact is that many of today’s successful companies started at kitchen tables, in basements and garages, or even mixing their products in bathtubs, on a budget. A look at Pampered Chef, Silpada, Longaberger and even Amway will reveal very humble beginnings. It may take longer and perhaps the chances of success without proper capitalization are much lower, but it can be done. Small startups may emulate from company profiles found at www.mlmlegal.com; they may do their initial books and commissions with Quicken and they may do their printing at local fast print shops. Just hang in there. Finance is “good,” but passion and hard work can also compensate. As Neil Diamond said, “money talks, but it can’t dance and it can’t walk.”

For more encouraging words to achieve success in network marketing on a budget, visit Attorney Jeff Babener’s websites: www.mlmlegal.com and www.mlmattorney.com.

In addition, our next Starting and Running the Successful MLM Company Conference takes place October 22 and 23, 2015 in Las Vegas. View our conference flyer and speaker list online. Participate in our Innovation Campaign for your chance to receive TWO FREE TICKETS to attend our next conference.

If you’re reading this blog post and the conference dates above have passed, check our website for the current conference dates.

Visit us at www.mlmlegal.com to learn more.

The second tax category that has impacted our industry is the sales and use tax. State governments – all governments – of course are in dire need of more revenue and have sought to increase taxing. Companies that market strictly on the internet, on TV and across state lines are shielded from having to collect sales and use taxes because of the Commerce Clause of the U.S. Constitution, which prohibits states from placing a restriction on the flow of interstate commerce unless there is some type of a nexus or connection in state. It has long been a consensus in our industry that, by having distributors in a state, by having them recruit, drive customer traffic to websites, recruit and conduct training, and promote sales,  that direct selling companies do have a nexus in the states where they have distributors. Therefore, almost all leading direct selling companies register to collect sales and use tax in states and they do so on behalf of their distributors, because if they don’t then they are concerned that they will be held legal liable.

In addition, as a practical reason for collecting and remitting sales and use tax,  companies realize  that if they ask their distributors to be responsible for their own sales and use tax collection and filings, companies are then merely creating another obstacle for distributors who should instead spend their precious time getting out there to promote, recruit and sell. Virtually every direct selling company, including the ones that market on the internet, collect, and remit sales and use taxes.  There are potentially thousands of state and local taxing authorities…..at a minimum, companies comply with sales and use tax laws at the state level. Larger companies than can afford the administrative costs also track and file at the local levels.

Additional information about taxes is available by clicking the links below:

Why do I have to pay sales tax? Article

Taxes and the Network Marketer Article

MLM and Sales Taxes Article

Internal Revenue Service (IRS) Advises Direct Sellers Webpage

What are the Central Tax Issues for MLM? Companion Video to this Blog Post

The Tax Guide for MLM/Direct Selling Distributors Book

As always, be sure to visit www.mlmlegal.com and www.mlmattorney.com for information and updates on the MLM industry.

The next MLM conference will be held February 21st and 22nd, 2013 in Las Vegas (keep a look out for the October and May conferences as well). Each day will begin at 9:00AM and end at 4:00PM, when the one-on-time will begin and end around 7:00PM. For more information visit: http://www.mlmlegal.com/srs2.html or call 800-231-2162/503-226-6600. Registrations are taken by phone and questions are always welcome.

Each attendee will receive a FREE copy of the Starting and Running the Successful MLM Company Manual.

Visit us at www.mlmlegal.com to learn more.