Guest post by Robby Forsythe, Senior Retirement Plan Consultant
Why was the seafood restaurant being investigated by the IRS?
It was suspected of being a shell company in some fishy business.
By now you’ve heard that the IRS has been allotted an extra $80 billioni. Why does the IRS having this incredible amount of money matter to your small business? Well, for some of my clients that I’ve talked to, it’s a source of some consternation…the only people I think are happy about this are…IRS agents.
The good news (if there is any) is they don’t get this money all at once – it’ll be doled out over a decade. Still, that’s a lot of money for one of my least-favorite government agencies, so here’s what I found about how the money will be used. Based on that, I have some ideas on how small business owners can avoid IRS attention.
They might answer your call
A portion of this budgeted money will go to replace more than 20,000 agents who left the agency since 2010 and the more than 50,000 agents who are due to retire in the next five yearsii. Talk about a Great Resignation! That’s a lot of attrition, and it means that there wouldn’t have been enough people to process your tax return or send you your refund if they couldn’t replace these agents.
I also read that they want to hire more people in customer serviceiii so that when you call, you can actually talk to a human being rather than having to navigate a labyrinthine phone system with endless robo-questions or be stuck on hold for hours. Won’t that be nice? (OK, having to call the IRS is never “nice,” but this will be an improvement!) Michelle Singletary of the Washington Post reportediv in June that the IRS only answers about 10% of the calls they receive—that’s 10% more than I thought, so it can only get better from here, right?
They’re supposed to be upgrading their computers
Anyone watch the show Mad Men? Remember the giant, air-conditioned room full of machines that had less computing power than an Apple IIe? I’m pretty sure that’s what they’re still using over at the IRS.
Their computer equipment and data storage, in many cases, hasn’t been upgraded since the 1960sv. As old as my dad! No wonder so many employees have left. Can you imagine trying to use a computer like that? Also, I’ve read that some of the budget will be spent on improving cybersecurityvi. I think we all intuitively know that our data should be secure with the IRS, but that it may not be the Fort Knox we all hope for and wish it was.
The IRS might be after you if…
A lot of people are concerned about an increased likelihood of being audited. And if your small business is earning more than $400,000 per year your tax advisor and you may get to know each other a lot more if you get audited. Even though the IRS has said that it will not expand audits on individuals earning less than $400,000 per yearvii, in my opinion, the amount of money they’re expected to raise with closer scrutiny of us all – means my small business clients could have a larger target on their back. What do you think?
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If you don’t want the IRS after you…
Why didn’t Sherlock Holmes pay a lot of taxes?
Because he made brilliant deductions. (From @J_Stephens_CPA)
While I can’t guarantee the IRS won’t audit you with their new capabilities, I have found that my small business clients who take these 6 steps seriously get audited at a much lower rate than those that don’t. So here are my 6 tips for your small business:
- Be scrupulously honest about any donations. Lots of people overestimate the value of their donations and this is a huge red flag for the IRS. Those old clothes really aren’t worth much, and you probably know it!
- Always keep your receipts. This is your evidence that what you say is true. Anytime you can back up a statement about your income, donations, expenses, etc., it’s better for you. Plus, you’ll need those receipts to back up your deductions. Anything you spend on your business such as office equipment, business travel, and even contributions to your employees’ retirement accounts may be tax-deductible, so you’ll need to have those receipts to prove it.
- Report every dollar of your or your business’ income. The IRS gets reports from other sources like employers, banks, investment firms, etc. that they use to verify what you report. If the numbers don’t match up, you guessed it: red flag.
- Don’t round. For reporting income, donations, amortization, whatever – use the real numbers instead of rounding them up or down. Never “guesstimate.” If your numbers look weird to the IRS based on those reports they receive from other sources, or if rounding causes math errors in your own calculations, you might be in trouble.
- Check your math! Not everyone got an A in accounting and IRS forms are notoriously complicated. But you need to go through your calculations with a fine-tooth comb AND a calculator. Errors may have been made by pure accident, but that’s not an excuse the IRS cares about. When in doubt, enlist the help of a certified tax accountant to help prevent mistakes.
- Don’t forget to sign your return. You’d be surprised by how many people skip this important and seemingly obvious step, but it’s a huge issue for the IRS. They will wonder what else you forgot and dig deeper. It’s so easy to knock this out in seconds, so make sure it’s on your tax return to-do list.
One more idea for small business owners
Consider offering your employees a 401(k) retirement plan that has a Safe Harbor provision. This provision entails that you contribute to your employee’s accounts and in exchange, your plan is considered compliant with IRS requirements and releases you from any audit of that plan. (You can read more about Safe Harbor 401(k) plans here.) It isn’t the same thing as a regular income audit, but why not do all you can to avoid any audit?
Any questions, suggestions, or other IRS jokes? Follow me on LinkedIn and share them on my page! Thanks for reading.