That’s right! These six numbers – 711510 – will help you avoid contact with the IRS. Why? Read on.
As an independent author, editor, illustrator, researcher or writer, you will most likely file a Schedule C (Profit or Loss From Business), used by sole proprietors to show business income and expenses for the year. Schedule C is attached to Form 1040 and becomes part of your overall tax computation.
At the top of Schedule C you are required to identify your type of business. Box A requires you to identify your “principal business or profession” which would be author, writer, illustrator, etc. Box B asks you to “enter code from instructions” and requires the filer to enter six numbers. A large percentage of taxpayers (and, sadly, even paid preparers) leave this box blank, put in the wrong number or enter “999999” to dispense with this requirement. In the case of paid preparers, this is inexcusable, since they just increased your odds of IRS contact.
As an “independent artist, writer or performer,” your North American Industry Classification System (NAICS) code is 711510 and should be shown in Box B of your Schedule C. The codes, for all types of business and professional activities, are found at the end of the Schedule C instructions. Make sure you or your preparer use this number.
Ok, so why is this so important? Schedule C’s are evaluated and scored by the IRS using the NAICS code shown on the form. The NAICS code you use determines the data base your Schedule C will be compared against to determine if your income and expense amounts fall within the “norm” for that business or profession. So, if you (or your preparer) put in the wrong code number, no code number, or 999999, your income and expense numbers cannot be properly evaluated and this will, most likely, raise your return score. The higher your score, the more likely your return will be selected for “further view” by the audit selection team, a rotating group of seasoned auditors who will visually scan your return to determine if an “office” or “field” audit should be scheduled. More about the differences in an office and field audit in a future blog. For the moment, let me just say if you are selected for a field audit, your entire return will be reviewed, not just Schedule C, at your home or business location.
Finally, do not combine separate businesses on one Schedule C. This just adds fuel to the fire. You may be a sole proprietor of two or three distinct and separate business activities during the year. The revenues and expenses for each business should be tracked and reported on a separate Schedule C, using the appropriate NAICS code for each one.
Use the proper NAICS code and lower your audit risk.