Tax Auditing
This is a topic almost everyone you speak those words to, would
like to avoid. No one wants to experience an audit first hand;
however, tax audits do not have to be the "monsters" we've made
them out to be. There are audits for personal returns, corporate
returns, and small business returns. Until recently, an
understaffed IRS found it difficult to conduct a large quantity
of audits. But now, be warned, their staff have increased, and
so too will the audits. What should you do to prepare and
maintain your records, should you be chosen for an audit? Here's
a little advice from the Internal Revenue Service.
Well, to understand the "real world" proportion of audits that
are conducted, consider this: the IRS conducting only .79% of
small firms during 2004; so, even though efforts have been
stepped up, the percentage is still going to be small. Some of
the more obvious items on your return that will peak the
curiosity of the Internal Revenue are travel and entertainment
expenses, depreciation, tax credits, charitable expenses,
shipping expenses, and sales and returns. As a general rule,
these are some of the expenses that are normally recorded in
erroneously, or with false figures.
There are "licensing and other fees", another area of concern
for the IRS that will flag audit personnel's interest. The big
one right now, seems to be the internet search fees, and other
internet related items, that are difficult to document, except
via credit card records, and usually these are personal credit
card records. Make sure that any information that relates to
such a charge is carefully kept and matched to the correct
credit card statement.
Advertising costs is another area for scrutiny. It has ties to
the internet, also. But advertising expenses are often just
that, expensive; there is room for error in record-keeping with
advertising and exactly what constitutes advertising. There are
also percentages that alert the Internal Revenue and generate an
interest when the variance from the national average is vastly
different. Make sure if you have areas where the expenses where
somewhat out of the norm, you document the reasons, and log
expenses in the right category.
There are guides available from the IRS that are published to
help industries and small businesses assure themselves they're
following IRS regulations and common trouble spots. Why does the
IRS furnish these guides? Because it's much better for you to
correctly complete your tax return, and pay the tax due without
auditing, than it is to perform and audit to correctly assess
any tax due. These guides are known as Audit Technique Guides
and they're available from the IRS, free of charge. They provide
you with your industry standards, the most common mistakes made
by these industries in their record keeping and tax reporting.
These guides were developed by the IRS in order to train audit
specialists about particular segments of business, so that when
an audit was conducted, the auditor was knowledgeable in that
particular field. So far, the training has proved invaluable,
and the program is working, to the benefit of the business
owners and the IRS, alike.
As with any segment of business, individual return, or corporate
operation, your best defense is a good offense. If you've taken
the time to keep adequate records, maintained good accounting
practices with your records, and sought the services of a
qualified tax specialist, you have nothing to worry about. The
IRS doesn't really deserve the "bad" image they've been given.
Their job is just like that of any other regulatory agency; they
have laws and policies that must be enforced, they are the
entity responsible for enforcing them. The people to be feared
are the policy makers in Washington that are slowly regulating
businesses and individuals into over taxation. Today, corporate
America pays fewer taxes than ever before. Post WWII figures,
indicated a close balance between individual tax liability and
corporate tax liability, today the percentages are closer to 4
to 1 (80% of the tax is paid by individuals and small
businesses). The really dangerous organization would be the body
of government that is deciding the regulations, not the
organization enforcing them.