Preparing taxes is a significant feat, and
as we approach the final hour of the filing season, now is an appropriate time to discuss the IRS audit and compliance environment for this year and down the road.
“Congress has allocated more money
and resources toward IRS audits, and the
IRS knows that by assigning more compliance personnel to the field, it will bring in
more revenues,” says Douglas Klein, CPA,
EA, a manager in the tax department at
SS&G Financial Services, Inc.
Smart Business spoke with Klein about
today’s compliance environment and auditing triggers to watch out for in the future.
What auditing environment can we expect
this year and beyond?
The IRS has more resources and more personnel in the field to audit, and statistics
show it is using its resources effectively. In
2007, 0.45 percent of subchapter S corporations were audited — up from 0.38 percent
the prior year. The IRS is cracking down on
discrepancies in what S corporations claim
as taxable officer wage income and what
those same officers actually draw tax-free
from the business. In instances where there
is a significant gap, the IRS will reclassify
nontaxable distributions as compensation.
Meanwhile, partnerships are scrutinized a
bit less often than S corporations, with a
0.42 percent audit rate. C corporations are
also more closely watched. In 2007, 0.92 percent were audited. Generally speaking, the
larger the company, the more likely the IRS is
to investigate a return for accurate reporting.
Why is the IRS tightening compliance now?
The IRS has been working behind the
scenes to improve its technology. It has the
systems to more efficiently and accurately
identify compliance cases. If the IRS audits
less than 1 percent of tax returns, it is closer
to targeting the right 1 percent, due in part to
tax information sharing agreements with
states and foreign countries. The IRS can
keep better track of U.S. citizens doing business abroad and identify when there are tax
compliance issues with cross-border transactions. Also, CPAs must work under new disclosure rules requiring businesses to air out information on their tax forms that was once
kept between them and their accountants.
What effect will new disclosure rules have on
businesses’ tax preparers?
New versions of book-to-tax income reconciliation schedules released in 2006 expand
what businesses must disclose about non-taxable transactions. Now, tax preparers are
responsible for closely questioning their
clients’ transactions, especially those that
might pop up on the IRS radar screen. One
red flag is shaky tax schemes, such as tax
shelters, or what the IRS calls ‘listed’ transactions. All listed transactions must be disclosed, and if information is concealed, the
IRS will impose severe penalties. While the
American Institute of Certified Public Accountants has objected to some of the new
policies, in reality, we’re in a tougher compliance environment and the IRS is better prepared to track down information.
Does tougher compliance always mean bad
news for businesses?
There is good news — it’s not all doom and
gloom. The IRS is partnering with practitioners in the accounting field and providing substantial relief to the paperwork burden. This
is largely thanks to technology upgrades.
Now, your CPA can access your account
information online and even refer issues to
the IRS for an electronic resolution via
secure e-mail. Payments can be made online
the same day, and most taxes can be paid
electronically. The IRS will stay out of your
life if your accuracy is up to par.
What measures can businesses take to
ensure accuracy of tax returns?
Accuracy begins with careful record keeping. You must keep a double-entry set of
books and carefully segregate business and
personal transactions. Also very important:
Do not neglect payroll taxes. Business owners fail to recognize that they may be held
personally responsible for paying payroll
taxes. We suggest using an outside payroll
company, which will automatically pay taxes
and assume liability for any tax notices or
penalties.
Finally, always include your CPA in conversations about major business events,
such as hiring a new partner, adding a new
product in a different state, etc. There are tax
forms that must be filed for these activities.
What should you do if contacted by the IRS?
Don’t panic. Most often, IRS notices simply
state that there is a discrepancy between
their records and the tax forms filed. Contact
your CPA immediately. Many of these issues
can be corrected with a quick letter or phone
call. Always take the actions that the notice
requests, and do not miss a deadline.
Finally, be aware of e-mail ‘phishing’
schemes from hackers under the guise of the
IRS, who will lure you to send personal information over the Internet. The IRS will never
send unsolicited e-mails. If you receive suspicious communications, forward the e-mail
to the IRS at [email protected]. The IRS suspects these scams will continue beyond the
filing season, so be on guard and protect
your identity.
DOUGLAS KLEIN, CPA, EA, is a manager in the tax department at SS&G Financial Services, Inc. (www.SSandG.com). Reach him at
(330) 668-9696 or [email protected].