IRS Targets Small Businesses for Audits
Profit Ability Article Highlight

IRS audits are often the storm looming over head for business and individual taxpayers alike. Many of us have nothing to worry about as an audit may just be a painless process involving a letter asking for receipts to corroborate your deductions. Even if you are chosen for an audit, there's no reason for you to worry because your deductions are completely unexaggerated, right? The truth is, tax rules aren't always the clearest pane in the window and many times it pays to take advantage of their ambiguity. However, the IRS is now watching a bit more closely.

Companies with less than $10 million in assets contributed more than $915 billion in taxes for 2001. That may seem like quite a bit, but according to the IRS, the figure should have been closer to $1.2 trillion. The IRS doesn't like the way those numbers add up. Given the ability for many S corps and partnerships to sometimes sidestep certain tax responsibility, the IRS will be paying closer attention these businesses that comprise a large chunk of uncollected revenue. Some 34,000 small business owners will have the pleasure of a face-to-face audit with their very own IRS agent over the next two years. Are you looking forward to the meeting as much as they are?

Luckily, there are things that can be done to lower the likelihood of an audit. Even if you find yourself face to face with an IRS agent, we've got a few simple steps to take if you happen to become one of the lucky taxpayers. There are a few base rules one must understand when trying to avoid an audit.

First of all, there is no sure way to avoid one. Some audits are completely random, and thus can't be avoided. The IRS does, however, use a formula involving factors such as income, deductions, and profession to determine your audit potential. The more your score deviates from the norm, the higher your chances of audit. Business expenses is a favorite area for the IRS to scrutinize, probably because personal expenses are just as easily claimed as business expenses, and the numbers are very easy to exaggerate.

Remember that large or unusual deductions raise your chances of being audited. If you are deducting a $50,000 trip to Bermuda as a business expense, include the clear substantiation with your filing (a note saying "business development" will not do). If it's valid, it will likely answer the IRS's questions before they even have to ask them, thus lowering the chances for an audit. Below are a few keys points to remember during the audit process:

Documention...More is Better: The more documentation you have for your deductions, and the more organized those documents are, the better. Your fistful of random receipts in response to a question about your return won't impress the auditor much.

Only a Fool Represents Himself: In the event you find yourself being contacted by the IRS for an audit (likely through a phone call or a letter), be sure to consult or hire an accountant or tax attorney at Talley & Company who specializes in tax representation. We offer audit representation services to ensure your audit is handled properly from start to finish.

You Have Rights: If audited by the IRS, know that you have rights. To name a few, you have the right to prompt, courteous, and impartial treatment and the right to a reasonable amount of time to produce requested documents. If you believe these rights are being violated, contact your local IRS office and file a complaint. For some other helpful hints, see our listing of potential audit triggers.

If you have questions on this issue, please feel free to contact our firm's offices at 714.937.6337. If you prefer, we can be reached via e-mail at info@talleynco.com.