Reduce your IRS audit target profile.

March 6th, 2013

For obvious reasons the IRS does not publish its internal guidelines for choosing business tax return audits.

Nevertheless, observers note frequencies of items attracting IRS attention.

Small business owners [me included] know that various decisions and estimates are made in preparing your tax returns.

Here are some suggestions which should reduce your exposure to the unpleasantness of an IRS audit.

1. Don’t be greedy. Example — If you your business vehicle is also used for personal reasons, and a fair estimate is 50-50, don’t claim personal use is only 7%. The IRS has supercomputers matching all your numbers with what it has determined is the “norm.”

2. The IRS is very interested in worker misclassifications – you know, where you claim a worker is an independent contractor and not an employee. Your benefit is no tax or social security withholding, no matching the social security portion. You also avoid the various similar state requirements. Even if you properly issue a Form 1099 to the worker, somehow that never gets reported by the worker to the IRS. The result – fewer revenues to the government. Of course, if you are a Massachusetts business, you certainly should be aware that the state has the toughest law in the US prohibiting such misclassifications.

3. If you report your results as an S Corporation, the IRS will check whether you purposely lower your “salary” and then take gobs as a “dividend” and thus avoid the 15.3% self-employment tax.

Those are but a few of the risks. I would urge each reader to ask the chosen tax preparer whether any choices have been made that might put the tax return at risk for an audit.

Of course, you may simply get caught in a random IRS audit. If that happens don’t panic. It is recommended that you have the tax preparer respond, whether in writing or at a face-to-face meeting, not you.



Biz Law News™ postings are provided for informational purposes only – they are not presented specific to any individual’s personal circumstances; they are not legal or tax advice and should not be construed as such.. They cannot in any way create an attorney-client relationship. Opinions and biases expressed or inferred are the author’s only. Believed-reliable third party materials are frequently used. Each reader, as appropriate, should seek independent advice from a tax or legal professional.

2013 © Gordon A Carpenter