Serena operates a gift shop. To reduce costs of credit card transactions, she offers customers a discount if they pay in cash. For the holiday rush, she hires some short-term workers but pays them cash and does not add them to the payroll.

a.Indicated whether the following statements are "True" or "False" regarding the tax issues for Serena.

She will not have to record the cash transactions. False She will owe FICA and FUTA on the short-term workers' wages. True Her workers will be classified as casual laborers or independent contractors. False She will be required file Forms 940 and 941 with the IRS. She must also timely issue a W-2 wage form to each of her workers. True

b.Assess Serena's chances of audit by the IRS.

Serena's chances of being audited are high. This is because she is self-employed, and appears to operate on a cash basis which provides an opportunity to income and/or expenses.