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Are Your Ready for the IRS if They Target Your Business?

  • ” Since I entered politics, I have chiefly had men’s views confided to me privately. Some of the biggest men in the U.S., in the filed of commerce and manufacturing,are afraid of something.  They know there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it.” 

    – Woodrow Wilson

    Although I’m not not a fan of Woodrow Wilson, since he expanded government and increased taxes, his quote captured the fear and angst that business people had toward the IRS and still have today.

    A soon to be released Inspector General’s report will highlight how the IRS targeted a group of tea party and conservative groups beginning in 2010.  According to an ABC News Report by Abby D Phillip: “Since as early as 2010, IRS officials have selected organizations whose names or mission statements suggested an affiliation with conservative or tea party causes,singling them out for additional scrutiny, according to excerpts of a forthcoming Inspector General report on the practice.”

    This post is not about the IRS tactics and whether it was a failure on the part of an individual, department, a planned attack by the IRS in general or a directive from higher up in the government.  Time will sort out the politics behind what transpired.

    If you are a business owner, an event such as this should give you pause and have you go back and check your current strategy of tax compliance.  The IRS is the biggest and most controlling bureaucracies in the world and is a constant in all our lives.  Our hearts skip a beat if a letter arrives from the IRS.  If not properly prepared the IRS can cost your business time and money.

    Tax Compliance Built on Fear

    For right or wrong, tax compliance and enforcement of the tax code is largely built on fear. Nobody wants to deal with the IRS so fear of receiving a letter, fear of being audited or fear of having criminal charges brought against you or your business insures increased compliance to the tax code.

    This post is not meant to debate whether the IRS or individuals over stepped their bounds.  As you can see from the quote by Woodrow Wilson fear of the IRS, by business people, dates back to when the IRS was still relatively knew. The angst and fear that business people had then still applies and is even greater today.

    The increased angst and fear of the IRS is because of the increased size, scope and power the IRS wields.  In the coming years with the roll out of the Patient Protection and Afffordable Care Act, it will become even larger and expand its authority over more of our lives.   Not only will the IRS be responsible for enforcement of the tax code, but it will also include monitoring and enforcement of the new healthcare reporting and compliance requirements.

    As a business owner, if questioned by the IRS it will be your responsibility to demonstrate compliance and justify the revenues you report and all expenses, deductions or credits taken.

    It all Starts with Good Records

    The critical component whenever justifying your revenue and expenses is your record-keeping. Here are a couple of quick tips that if you are not doing so already you should implement immediately

    1. Work with a good CPA.  A CPA can help you with tax fillings, tax compliance and tax reporting.  They can represent you before the IRS and be your business consultant for your business.

    2. Always, always always, separate your business bank account from your personal account.   I know this sounds like a no-brainier, but we get several people a year that are starting a business or have had a business and never bothered opening up a separate bank account a or applied for a separate EIN number for their business.

    3. Maintain an accurate set of books.  With the popularity of Intuit’s QuickBooks, many business owners have taken a Do-It-yourself mentality and try to maintain their own sets of books.  Unfortunatley, almost all have no background in accounting and try and learn some basic accounting principles on the fly while learning a new software.  More than 75% of the time we receive financial records, where the owner or owner’s friend, acquaintance, family member is maintaining them and they are wrong.   For a few hundred dollars a month you can outsource them to a company such as ours and you will receive a fully accurate set of financial records.

    4. Keep your financial records separate for each year. The IRS a few years back bought thousands of copies of QuickBooks and trained IRS staff members on how to use QuickBooks. If you are using an electronic software programming such as QuickBooks they can demand a copy of your electronic file.   Unfortunately, when the IRS receives your file, you will most likely be providing them with not only the year they are demanding but previous and current years that may not have been requested.  Whose to say they wont take a peak at those other years as well and question you for years not included in their audit.  With this latest IRS scandal, we see rules and procedures aren’t always followed.

    5. Maintain either hard copies or electronic copies of all receipts to backup expenses taken.  This includes keeping all receipts, maintaining a mileage log if you are taking mileage and maintaining a calendar showing business dinners and appointments for any meal expense, business expense, or mileage expense.

    The power and authority of the IRS is not going away.  As a business owner, you have to be prepared for an inevitable audit by the IRS.  Taking these steps will go a long way in demonstrating compliance and keeping the IRS out of your business so you can focus on growing your business.

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