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Here’s the tax situation if you’re self-employed: The Internal Revenue Service is going to pay close attention to your returns.

Mike “The Situation” Sorrentino in Las Vegas. © Scott Harrison ./Retna Ltd./Corbis

Mike Sorrentino discovered this tax truth the hard way. The former “Jersey Shore” reality TV star popularly known as “The Situation” has been indicted on federal charges of failing to pay taxes on $8.9 million he earned between 2010 and 2012.

That money, according to the U.S. Attorney’s New Jersey office, came from two companies controlled by Mike Sorrentino and his brother Marc, who also was charged in the Sept. 24 indictment.

The brothers started MPS Entertainment, LLC and Situation Nation, Inc. to cash in on The Situation’s celebrity on the MTV show. They were successful, but prosecutors allege that the duo failed to share the appropriate amount of their wealth with Uncle Sam.

Mike Sorrentino didn’t file a tax return for the almost $2 million he earned in the 2011 tax year, according to the indictment. When returns were filed, allege federal law enforcement, the brothers conspired to file false 1040s.

U.S. attorneys contend that as part of the conspiracy, the brothers fraudulently claimed millions of dollars in personal expenses as business expenses, including payments for high-end vehicles and clothing, personal grooming expenses, and distributions — or direct payments — from the businesses to personal bank accounts.

Self-employment tax targets

Note that these are just charges. The Sorrentinos will get their day in court, unless they follow fellow New Jersey reality TV stars Teresa and Joe Giudice and plead guilty.

But until that court date or plea deal, the New Jersey brothers are presumed innocent.

Still, the 15-page indictment is a primer in what not to do when it comes to self-employment taxes.

Remember that the IRS has long paid extra attention to filings by folks who are their own bosses. It’s just too easy for such taxpayers to tweak the numbers since, in many instances, there is no third-party verification of income or expenses.

Bad tax practices

Here are some of the things the Sorrentinos allegedly did to get into tax trouble:

  • First, they comingled business and personal accounts. That’s a no-no for many reasons, including the complexity in proving what was business and what was personal. Such transactions are sloppy business practices at best and, in the IRS’ eyes, an indication that something is not quite right.
  • Second, they took some payments in cash. This is another big red flag for the tax auditor. Cash payments are easy to under report, if reported at all, at tax time.
  • Third, they claimed a lot of big-dollar business deductions. “These false and/or inflated business expenses included, among other things, payments for several high-end vehicles, purchases of high-end clothing and personal grooming expenses that were disguised as legitimate business expenses,” according to the indictment. Fake business expense claims are bad enough. Extravagant ones are an engraved invitation for an IRS examination officer.
  • Finally, they duped their tax accountants. The feds charge that the Sorrentino brothers knowingly provided their accounting firm with false information, which was used unbeknownst to the paid preparers, to file incorrect tax returns.

We’ll have to see what happens in the Sorrentinos’ tax situation. Mike and Marc are out on bond pending the resolution of the case.

You, however, can avoid ending up in a similar bad tax situation (OK, I know, too much, but this is the last time I’ll use that word) by not being like these New Jersey brothers.

More tax info from Bankrate

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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and co-author of the e-book “Future Millionaires’ Guidebook.”