Audits of Small Businesses and the Owners
For many years we have been reading IRS pronouncements and studies regarding IRS perceived abuses, underpayment of tax, overpayment of tax caused by both a lack of planning and a lack of understanding of tax laws, and ultimately the IRS’s plan to audit more small businesses, closely held business, and family business. Why more audits? Well, obviously as a way to raise revenue. But really, the IRS sees you, the business owner as an easy target. Who has the time to handle an auditor? My records and financial are in bad shape. It can be a stressful situation and the IRS wants it to be stressful. They want you to write a big check just to get rid of them.
Why the IRS Audits Small Businesses
Unreported Income – The IRS will assess tax, penalty, and interest on unreported and underreported income and withdrawals from the business. A business that lacks a strategic tax plan will try to create opportunities to pull unreported cash from the business. Examples are cash sales, or recycling metal scrap for cash. These practices are risky and generally not difficult for the IRS to find.
Personal and Business Expenses – The IRS will scrutinize expenses relating to entertainment, meals, travel, transportation, fuel charges, and company cars to name a few. Be prepared to answer questions and more importantly provide detailed records to support the expenditures as valid business expenses. Expenses should tie to a business purpose.
Employees versus Independent Contractors – The IRS will want to make sure you are not improperly classifying employees as independent contractors as a method of avoiding payroll taxes and other employee expenses. This is viewed as an abusive area by the IRS and they can assess tax, penalty, and interest. If the individual in question provides services to other businesses, has his own tools, truck, and business cards, and is told what to do and not how to do it – he will likely be found to be an independent contractor. (We have discussed this important topic in more detail elsewhere in our Blog –see IRS Hot Topics)
What Should You Do?
Be Proactive – Engage in proven strategic tax planning supported by the Internal Revenue Code. Have your returns reviewed by an experienced tax attorney to eliminate any current red flags that increase your chances of an audit. The more tax planning that you and your business do, the less likely you are to be audited.
Seek Help – Lose that entrepreneurial spirit that may tempt you to handle the audit yourself. An experience tax defense attorney handling the audit from day one will direct the auditor instead of the auditor directing you. Sure you could wait and only seek help for an appeal of the audits findings, but by then you may have inadvertently given the auditor too much information.
Call us for help or with questions!
The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.
We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.
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