How outsource accounting prepares clients for IRS audits
Before I was asked to start my own agency, I have to be honest, I was terrified of being audited. I am not so great on keeping track of things and it scares me silly picturing “the Tax Man” at my door asking to see my past 5 years tax returns.
I did some digging and found out a few things that put me at ease.
How much do you earn?
“According to the IRS, of the nearly 141 million individual returns filed for fiscal year 2011, 1.1 percent were audited. Six percent of the IRS audits conducted on individuals in 2012 were for people who made between $200,000 and $1 million. People with incomes of $200,000 or higher had an audit rate of 3.26%, or one out of every 30 returns. People with $1 million or more of income had a one-in-nine chance of their returns being audited.” (INC.com)
(That’s a relief because I am quite below the audit threshold for earnings!)
Self-employed? Take a number!
Ah yes, if you work as a contractor or are self-employed, you are more so a target than other wage earners. (Wait, that includes me too!) The IRS keeps a close look at financial activity for those claiming the “be your own boss” title. So don’t go mixing business revenue with the personal account. Here are a few more pointers I discovered:
If you are investigated, expect the IRS to ask the following questions or look into the following issues:
Did you report all of your business sales and receipts?
Did you write off any personal living expenses as business expenses?
Does your lifestyle apparently exceed the amount of self-employment income reported?
Did you write off automobile expenses for travel that was not business-related?
Did you claim large business entertainment expenses?
Are your workers wrongly classified as independent contractors when they are legally employees?
Are you making payroll tax deposits?
Are you reporting all cash transactions — especially large cash transactions?
So really, when your number is up, it’s time to pay the fiddler. That sounds morbid and we’re not talking death here, but it is the truth. “There’s really very little you can do to avoid it. You might be high risk or not. You can go out of your way to avoid scrutiny but still win (I mean lose) the lottery and get selected for an audit. And that’s what gives the IRS its power. . . and keeps us all honest. Because getting selected for an audit, or even just being asked to provide information to the IRS is scary. Stressful. Distracting. Costly. Time consuming.” (INC.com)