Entrepreneurs Seem to Ask for an Audit

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"Go ahead, audit me."  OK, so maybe you'll never hear those words cross the lips of a rational small business owner.

But, by their actions, some entrepreneurs seem to ask for an audit.  They keep falling into the same traps that trigger the dreaded encounter known at the Internal Revenue Service as "an examination."

There are 13 words you never want to hear from that agency:  "Your federal return for the year shown above has been selected for examination."

And there are six notices you don't want to receive: CP2000, CP2501, CP102, CP165, CP205 or CP251.

If you get one of those, either what you claimed you made doesn't match what the Internal Revenue Service records show; you made a math error in the Internal Revenue Service' favor; you had the nerve to let your check to the Internal Revenue Service bounce; you used the wrong taxpayer ID number or information was wrong or missing when depositing your payroll taxes; or, there's an employment tax problem and the Internal Revenue Service wants more information.

Here are some common small-business audit triggers:

• Excessive travel and entertainment expenses. Better document the amount, nature and rationale of your company's T&E expenses.  Don't confuse personal expenses with business items.  Document your mileage too.
• Home-based business expenses.  Excessive amounts for depreciation and utilities won't fly with the Internal Revenue Service.
• Lax year-end reporting.  You'll surely get the Internal Revenue Service' attention if you don't file your W2s, 1099s and other year-end reports on time.
• Late payroll tax deposits.  Another attention-getter.  Money withheld from employees' salaries doesn't belong to the company.  Send it in on schedule.

Experts say small businesses routinely make tax mistakes related to employees, independent contractors, salaries, dividends and loans, travel and entertainment, fringe benefits and home office deductions.

An Internal Revenue Service spokeswoman said most home- based businesses accurately report their income and expenses.  But, "some home-based business tax schemes have gained popularity over the last few years.  Nondeductible personal living expenses cannot be transformed into deductible business expenses regardless of how convincing the information in marketing materials may seem."

What should you do if an invitation arrives, summoning you to an Internal Revenue Service audit?  Don't panic, stay calm.  It may require a fairly simple fix.  A lot of the time it can just be a mistake on the tax return.

• Get organized.  Gather all relevant records.  Contact your EA, CPA, or expert tax preparer.  Don't hide anything.
• Don't attend your audit.  Let your Representative handle it.  Representatives know the rules that small businesses often can't keep up with.
• Zip your lips.  When the taxpayer is in a conversation with the Internal Revenue Service, they may volunteer information that causes more trouble or leads to other areas that don't need to be looked at.

In my experience, it has never been a good thing for a taxpayer to be in an interview.  If nothing else, excess time will be consumed.  If you insist upon attending, answer questions truthfully and say only what's asked of you.  Don't volunteer information.

Keep good records.  Don't be afraid to ask your tax preparer questions.

Call the Internal Revenue Service anytime, or browse its Web site, www.IRS.gov

Learn your rights as a taxpayer by reading Internal Revenue Service Pub 1 and Pub 334, "Tax Guide for Small Business."

Read Pub 583 for record keeping requirements.

Don't sign a blank tax return.

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