The IRS is cracking down on Sole Proprietors, such as The Easter Bunny, The Tooth Fairy, and Possibly even Santa Claus regarding excessive tax write offs, especially in the mileage claimed for business use.

These characters apparently never set up the right corporate structures to protect themselves and decided to operate as the most simple business form, the sole proprietorship.

Unfortunately, the sole proprietorship has the most liability, least tax benefits and the most possibility of negatively affecting ones revolving debt and future ability to develop business lines of credit.

Even the Easter Bunny can not afford to ruin his personal credit by using personal credit cards to finance his Easter Egg Business!

Why is a sole proprietor most likely to be audited?

The IRS believes there is a $300 BILLION tax gap --- $300 BILLION in uncollected taxes --- each year! The biggest culprit? Not large corporations, but small business owners.

In fact, sole proprietorships are 300% more likely to get audited than someone who does not file a schedule C!

It is important that any business owner also document their records properly. In fact, the Easter Bunny may have excessive claims of business mileage especially since he has never owned a car.

One more major problem! Anytime you operate a business as a sole proprietorship and you use your personal credit cards to finance your business, which is very common, you jeopardize your ability to obtain more business credit in the future when you incorporate.

Why? When you incorporate your business and apply for a business credit card, a smart thing to do, you will stop using your personal credit cards. The key is to protect your personal revolving debt ratio. It should at least be a 50% ratio between your credit limits and your current balances. Less is better.

Keep in mind if you have a home equity line of credit (HELOC) that is viewed as the same as a big credit card by the credit agencies.

Solution: Run your business like a business. Document all your business expenses, use QuickBooks or some other accounting software to operate your business, and DON'T operate as a sole proprietorship! Incorporating is a much better approach.

Scott Letourneau of Nevada Corporate Planners has been called by the Famous 3 to see how they can correct their situation for the future. Mr.Letourneau says,The Easter Bunny has concerns also over protecting his Egg-sets (Assets) and his business that just can not be done in his current Sole Proprietor Status.

Update: A drunken Leprechaun faced an IRS audit this week for similar reasons and did not fair well after St Patrick's Day!