IRS steps up small business audits

By Kalle Eko, correspondent

Jim Moore, tax director of RSM McGladrey in Cedar Rapids, says it straight.

“Bottom line, there really is no way to avoid an audit,” he said. “There's just things to do to assist if audited.”

According to a report from Syracuse University's Transactional Records Access Clearinghouse, during the past five years the Internal Revenue Service has spent 30 percent more time auditing businesses with under $10 million in assets. Conversely the IRS has spent 33 percent less time auditing corporations with assets of $250 million or more.

Partly due to these increasing risks of audits, Corridor accountants find themselves spending more time preparing small business returns than any other type.

Throughout the year, accountants also consult with small business owners in an effort to minimize those IRS audit risks.

“Number-wise, probably two-thirds (of tax cases) are individuals and a third are businesses,” Moore said. “But I spend most of my time doing business returns. The rest of the year is spent working with clients in tax planning.”

Small businesses are less likely to have the resources and staff dedicated to handling their taxes, a reality that may lead to more errors in the face of increasing scrutiny by the IRS.

However, if audited, businesses or individuals have the right to seek an attorney or representative to act on their behalf.

“We like to be the liaison between the client and the IRS,” said Doug Funke, CPA and partner at Honkamp, Krueger and Co. in Hiawatha. “We will make arrangements for the IRS to come to our premises. It's for (the clients') benefit and their own safety.”

Overall, IRS statistics indicate that on a consistent annual basis, about 1 percent of all returns are audited. However, statistics also show that sole proprietor Schedule C returns - commonly filed by small businesses to show profit or loss - are approximately 10 times more likely than general returns to be audited.

If audited by the IRS, small businesses can expect the process to last approximately six months. Careful documentation, and prudence when separating business from personal expenses, are among the most important steps in successfully making it through an audit.

“Any time you have a small business, one of the things the IRS looks at is commingling business expenses with personal expenses,” RSM McGladrey's Moore said. “Use of car, for instance. That's certainly an area that the IRS is concerned about.”

And while most audits happen by mail, it isn't uncommon for IRS agents to appear in person and, according to Funke, be “creative in their fact-checking process.”

“If there's a small business person paying hourly wages to one of their children, I've heard of agents going to their high school to find scheduling conflicts,” Funke recalled.

Regardless of the type of filing, though, prudence and documentation can help prevent deductions from bringing up red flags in the eyes of the IRS.

As Bruce Guither, a CPA with Carlson, Hartsock and Guither, explained, someone with $30,000 in income claiming a $50,000 tax deductible donation to his church would be correct to claim a deduction - but also be highly likely to draw the attention of an audit.

“Normally you wouldn't want to show that,” Guither said.