It’s essential to be in accordance with the tax laws. But even then, that won’t completely prevent your chances of being audited. If you want to minimize your chances of getting audited, take steps that keep you off the IRS’s radar.
Irvine, CA (PRWEB) May 08, 2013
Forty years after the fact, the IRS continues to go after Viacom Inc. and CBS Corp. Chairman Sumner Redstone for what they consider to be delinquent taxes. As reported by Matthew Fleischer in the LA Times, the IRS has stated in a U.S. tax court filing that Redstone owes $1.1 million in back taxes, penalties and interest from a series of unreported taxable gifts to his family in 1972 – a filing that Redstone disputes.
According to Wertz & Co., an Orange County accounting firm, the case shows just how relentless the IRS can be when pursuing a case they feel is not in compliance with tax laws, or worse, fraudulent .
“The IRS is persistent,” says Marcelo Sroka, a tax partner at Wertz & Co. “It’s essential to be in accordance with the tax laws. But even then, that won’t completely prevent your chances of being audited. If you want to minimize your chances of getting audited, take steps that keep you off the IRS’s radar.”
According to Wertz & Co., here are some “hot button” areas that will draw the attention of the IRS at tax time.
Company cars and other fringe benefits. The IRS has very specific rules regarding how companies should treat fringe benefits for their employees, including owner-employees.
Taxpayers with high income and/or high wealth. An income of $250,000 not only makes you wealthy, it also makes you an IRS target. This is especially true if you have a sole proprietorship (Schedule C). The IRS audits more than 12% of all Schedule C businesses that earn more than $1 million a year in gross revenue.
Employer tax credits. Under the Affordable Health Care Act, certain small businesses are entitled to a tax credit for providing health insurance to their employees. Along with those tax credits they also get a higher level of IRS scrutiny.
Foreign transactions. The IRS is stepping up their efforts in this area. They are determined to uncover people and companies they believe are hiding money and income outside the U.S.
Partnerships and S-corporations with large losses. The IRS considers many of these losses as tax shelters or exaggerated hobbies, and will closely scrutinize all related expenses.
S-corporations with any losses. In order to deduct these losses, the owners must have sufficient basis, or investment in the business. This is a very complicated area, and the IRS thinks that many taxpayers don’t do it right.
Owner compensation. The IRS is concerned that C-corporations pay their owners too much in order to avoid corporation-level taxes, and that S-corporations pay them too little, thus avoiding some Social Security taxes. To avoid penalties, proper documentation on how such compensation was determined is very important.
Worker classification. Many companies are unclear on when someone should be paid as an employee and when they should be paid as an independent contractor. The IRS knows, and they’re going after the companies that do it wrong.
Not reporting all income. The IRS has many ways to track income. Individuals should never under-report their income, even with a cash business.
Large meals and entertainment deductions. The IRS feels many companies and taxpayers take advantage of these deductions. Be prepared to provide proper support for how these expenditures relate to business.
“Finally, don’t overlook any ‘red flag’ items that don’t make sense” says Sroka. “For example, reporting an income of $100,000 along with mortgage interest of $40,000. Or a doctor and attorney married couple reporting a joint income of only $100,000. There are circumstances where these could occur. But be prepared to give the IRS a full explanation, along supporting documents.”
About Wertz & Company
Wertz & Company is an Orange County accounting firm that specializes in working with entrepreneurs and business owners along their journey to success. The firm offers accounting, financial planning, estate and wealth management planning, tax preparation, and other management consulting services in a personal, proactive, responsive manner. With a strong commitment to the local community, Wertz & Company contributes to several different charitable endeavors. For more information, visit http://www.wertzco.com.