Bohemia, NY (PRWEB) February 07, 2013
A recent article published by Market Watch gives some tips on facing the dreaded tax audit and for reducing penalties. The article reads, “Let’s say you’re facing an audit on your business taxes — two Schedule Cs. You made a couple of mistakes on your tax return that are obvious, now that you’re looking at it again. Should you just skip the audit and file an amended return?”
According to the article, no. Never ignore the audit “invitation,” urges the author. Auditors have two overriding goals and they are beguilingly simple. Firstly, according to the article they want to verify that all the expenses reported were indeed business-related. Secondly, they want to confirm that all income was actually reported. It's your responsibility to prove that you don't have any income that is unreported or any personal expenditures, and that your business is not “a hobby,” says the article. It's important to provide any crucial documents that will support your claims (or deductions), reports Market Watch. The article states that if they are impossible to find or reconstruct, you can ask for written affidavits from experts or other parties who can verify your claims objectively in order to satisfy the auditor.
“The IRS examiner routinely adds up all the deposits to all the taxpayer’s bank accounts,” states the article, adding that the result can be misleading, and showing that the number of deposits for small businesses is much greater than the amount of income stated in their return. “This is a trap: Beware. After all, when you use several bank accounts, you routinely transfer funds between them, have to redeposit bounced checks, or deposit cash advances and other loans,” notes the article.
In the current economic climate, the audit preparation process will be especially important for businesses that have shown a loss in the previous year. It's essential to show proof of income sources such as “credit-card balance increases, cash advances, loans, or funds drawn from your own savings, investments or home-equity line,” advises the article. Businesses should be extra vigilant about details such as vehicle usage, warns the article: “Recently, a Tax Court case had a rather distressing outcome: It didn’t accept a taxpayer’s notations in his daily planner showing where he traveled to his appointments (the planner didn’t list mileage to each location, show where each trip started from, or the cost of each trip or activity).”
The article closes with tips for reducing penalties. The IRS charges monthly interest on your combined penalties and taxes until they're paid in full – reduce the penalties, and you reduce the interest, states Market Watch. The best thing you can do is avoid filing or paying late. The article mentions a few excuses that are considered acceptable for late filing, but these are limited to extreme circumstances (e.g., the death of the taxpayer or of a spouse; severe illness or incapacity). The highly-motivated can look at Chapter 20 of the Internal Revenue Manual, according to the article – the employee manual contains the IRS' own criteria for waiving penalties.
Long Island CPA firm, Diapoules and Feinstein CPAs P.C. responds to the article, providing further advice for taxpayers. According to Marvin Feinstein, “We agree that the worst thing you can do is ignore the IRS’, or any state or local governments’, request for an audit. Most importantly is for sole proprietors to keep adequate books and records. In order to avoid the “IRS Trap” of comparing bank deposits with their reported income they need to accurately record their transactions and prepare bank reconciliations so that if asked they can prove that their reported income is correct. They should utilize an accounting program such as Quick Books or Sage’s Peachtree to record their financial activity. In addition, their general ledger will verify how they arrived at their reported deductions. But beware, if business owners improperly report personal expenses as business expenses the IRS will disallow those deductions and will most likely expand their audit by requesting additional documents which may lead to more questions.”
Diapoules and Feinstein CPAs P.C. have been providing accounting, auditing and tax services to Greater New York City area since 1989. D&F provides our clients with great personal attention and years of professional experience in order to see them succeed and help them to feel confident.