You now that old adage, “the bigger they are, the harder they fall”?  Well, you can bet that the IRS believes that is true.  Because, with their cuts in funding, the IRS has decided that the rich and the small business owner are the best targets for their audits.

For example, the IRS now audits more than 10% of those folks earning $ 1KK- up from 6% only 4 years ago. It’s not that the smaller fish don’t have problems- it’s more related to the fact that even if the IRS finds they have problems, they can’t pay!  And, those with businesses to run or wealth to protect, will insure the IRS bills get paid.

Besides having wealth or a means to shelter income, the best way to be in the IRS cross-hairs is to employ a tax advisor who has run into big trouble with previous clients.  We picked up about a dozen clients this year, because the taxpayers recognized that their previous advisors clearly played fast and loose with the law.  While their advice may have created generous savings, the risks outweighed the benefits.

You shouldn’t expect a tax auditor to knock on your door.  (I do recall Mr. Nicely [yup, that was his name] who took up residence in our office for a week many years ago.  Oh, he found that the IRS owed us money, too!)  But, if TWO agents show up- call for a lawyer or an Enrolled Agent right away- the IRS sends two, when they want to be able to verify what may or may not have been said or seen; you need the same verification.

But, most audits are done via mail.  These “correspondence audits” comprise about 1 million of the 1.4 million examinations the IRS effected last year.  While they may only focus on one issue, these letters need a proper and timely response- or a more complete audit may ensue.

So, let’s start with the best way to stay in the good graces of the IRS. Keep accurate records.  Oh, I know that’s simple, but so many clients (and taxpayers) just don’t get it.

When your business generates revenue of $ 50K or less (that’s revenue, not profits), you can probably keep your records via a spreadsheet.  But, once your revenue hits six digits, that becomes problematic.  The IRS wants to know that there is some sort of “permanent record” that forces you to not cheat.

And, if your business hits seven digits (that’s a million for those of you who are mathematically challenged), even the use of Quicken Home and Business becomes an issue.  Unless, of course, your average ticket item (either product or service) is $ 50K, so there are not many entries.

“Contemporaneous records” are also the golden standard that the IRS wants.  So, that means you can’t keep bringing us- or others- your credit card receipts and checks and expect us to create the documentation to please the IRS at the end of the year.  Unless, you have us do so on a monthly basis, at least, you can expect a problem.

That rule (contemporaneous records) also applies for tracking mileage or notes about what was discussed at a business meal.  (If you are a client of ours, we have already offered you a free [yes, FREE] smartphone app to track your expenses and mileage in a contemporaneous manner. )

And, if you get a 1099 that is incorrect, don’t just make believe it doesn’t exist and report what you feel should be right.  You need to notify the form provider of the error- be that because the amount is wrong or they used your social security number and not the Federal Identification Number (FEIN) for your business.

You also should recognize that you need to keep your records for seven years.  (That’s six years AFTER you filed the tax return.)  Unless, it’s for an asset (stock, home, etc.)- because, then, you need to keep your records for the six years AFTER you dispose (sell, destroy, remove) of the asset.

Remember- there’s less than a month less to file your personal taxes.  If you manage a corporation, you have already missed the deadline!

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