Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Income — Business; Form 1040, Line 12

Clarifying Taxpayers’ Business Income and Expenses

Clarifying Business Income and Expenses

All IRS-certified volunteers must exercise due diligence when preparing tax returns. Due diligence means doing your part to ensure tax returns are correct.

This means, as a volunteer, you must do your part when preparing or reviewing a tax return to ensure the information on the return is correct and complete. Generally you can rely in good faith on information from a taxpayer without requiring documentation as verification.

However, when preparing a tax return with a Schedule C/C-EZ and the earned income credit (EIC), take additional steps to determine that the net self-employment income used to calculate the amount of, or eligibility for, EIC is correct and complete. Additional clarification or inquiries should be made if the information furnished by the taxpayer appears to be incorrect, incomplete, or inconsistent. Taxpayers sometimes want to over report or under report their income to qualify for or maximize the amount of EIC.

Ask sufficient questions of taxpayers claiming self-employment income to be satisfied that:

  • The taxpayer actually conducts a business
  • The taxpayer has records to support income and expenses, or can reasonably reconstruct income and expenses records
  • All income and related expenses have been included on the taxpayer’s Schedule C/C-EZ

Emphasize to taxpayers that in the event of an IRS audit, they would need to provide receipts to support their figures.