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 defence 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.