The second biggest tax mistake you can make is fearing, rather than respecting the IRS. Do you fear an IRS audit? Do you suffer from “audit paranoia”?
Yesterday I sat down with a potential new client and reviewed last year’s tax return. OMG. She had paid really big bucks to a really big out of town tax preparer.
But it was clear that the tax company failed to take some really big deductions. Really big and totally legal deductions, I might add. Missed deductions that are 100% compliant with the tax code and supported by tax court rulings.
She paid thousands more in taxes than she should have paid.
The preparer…
- failed to maximize her deduction for auto expense,
- discouraged use of a legitimate office in home deduction, and
- didn’t mention the benefits she could obtain by operating her business as an S Corp.
(Hey I get it! No one wants to be audited, and it’s not a smart move for an accountant to invite an audit by being overly aggressive and taking deductions that waive a “red flag”. )
At the same time, are you aware of the fact that audit rates are actually at historic lows?
The IRS primarily targets small businesses with net incomes over $100,000, especially sole proprietorships. And especially cash industries like pizza parlors and convenience stores and coin operated laundromats with opportunities to hide income and skim profits.
In fact the IRS publishes a series of audit guides that you can download from the IRS website that tell you exactly what they’re looking for when they audit you.
If you’re really worried about being audited you might consider reorganizing your business. The IRS audit risk for S Corps is four times lower then for sole proprietorships or single-member LLCs.
ANCHOR ON THIS: You should respect the IRS, but don’t fear it. Know the tax code. Be sure your business is organized to minimize your tax and your audit risk. If you don’t know the code, or understand how to operate as an S Corp and other legal business entity structure, get help from someone who does. A tax professional will take advantage of every legal deduction, loophole, tax credit, and strategy available, steer you clear of an audit, and minimize your tax liability.