How to Get Audited
The government needs money. Hopefully, after you read this article, they will not get any more of yours. The IRS has learned that small businesses give them the best results on audits with the least effort on their part. The IRS has decided to go where they think the cheating is taking place. Unfortunately, they think that you and your small business are not paying your fair share.
The IRS has increased audits of small businesses by fifty (50) percent, so you need to learn how to better protect yourself. Most of what is in the next three paragraphs is what you should NOT do.
Have a lot of zeroes after the numbers on the return. Amend the return. Take a low salary while operating as an S corporation or as a sole proprietor. Have unreported income, especially in cash. Live in an expensive house, or otherwise in visible opulence, while taking a low salary. That way, people can wonder how you can afford that house, car, etc.
Let me clarify the statement in the preceding paragraph about having a lot of zeroes after numbers on a tax return. I do not mean high figures, since you must report income truthfully, of course. What I mean is that numbers that are too round lead IRS agents to think “estimate”, and this leads to unnecessary attention and scrutiny.
Make sure that your retirement plan is never updated as the law changes. Hire independent contractors, illegals, etc. Make use of an abusive tax shelter and/or listed transaction as a vehicle to reduce taxes. Seriously, you may be surprised to learn that many popular retirement and life insurance employee benefit plans fall into these categories.
If you are in a listed transaction, accountants now must report your participation to the IRS or face potential monetary fines and penalties in six figures, up to $200,000. Accountants and other tax return preparers also face increased penalties and scrutiny if clients take questionable tax positions or deductions. The upshot of all of this is that your activities, even if you are unaware that they are questionable, are increasingly likely to attract the Service’s attention, making you a likely audit target.
Even now, there are still creative ways to reduce taxes and, for good measure, insurance costs. You might try renting a captive insurance company, which often greatly reduces both taxes and insurance premiums. Use of a health savings account can accomplish the same goals. A Voluntary Employees Beneficiary Association (VEBA) can do all of this as well as allowing the deduction, for tax purposes, of estate and business succession plans. Life insurance costs can be reduced through the use of a technique known as the insurance swapout process. Do you want to obtain insurance without a cash outlay? Use non-recourse loans. And, you can turn your life insurance into cash that you can use, without dying, by use of a life settlement.
These are just some techniques that, by applying just a few of them to your business, you could save thousands or even more. Above all, and more on this later, it is most important to find an accountant who acts as your tax protector instead of an IRS collection agent. Most accountants seem to simply return your tax return with instructions about how much to pay and where to send it. Only if pressed will they even be bothered to try to explain anything. You have to do better than that.
Returning for the moment to possible money and tax saving techniques, consider operating as a C corporation, which makes many otherwise non-deductible expenses deductible. Consider using a VEBA, 412(e)(3) plan or K plan to keep more of your own money in your pocket. Health savings accounts, captive insurance companies and life insurance swapouts can all reduce taxes and insurance costs.
There is probably not a business owner anywhere who does not think he pays too much in taxes. Most, in reality, actually do. Accountants have to “play it safe” nowadays, which does not reduce your tax bill. On typical returns, tax preparers’ work is often subject to “interpretations” of the tax laws. Recent law changes may force preparers hoping to lower a client’s tax bill to be less aggressive with respect to these interpretations, or else they may risk substantially increased penalties. If a client insists on taking an aggressive deduction, the preparer, hoping to protect himself from sanctions, may include a form explaining the circumstances. This may protect the preparer while triggering an audit of the client.
This understandably angers taxpayers who feel strongly about particular deductions. And these penalties do not apply to taxpayers preparing their own returns. But, of course, notwithstanding this, the more complex a return is, the more foolhardy it is to prepare it without professional assistance.
But the bottom line is that your accountant is reluctant to be aggressive anymore, and is less likely to give you the benefit of the doubt on tax deductions. For example, if a client is participating in what is known as a “listed transaction”, both the taxpayer and the accountant must file with the IRS, alerting the Service to the taxpayer’s participation. A simple failure to file, for whatever reason, can result in a penalty of up to $200,000, as can incomplete, inaccurate, and misleading filings. These penalties apply to both the client and the accountant. All of this filing, of course, may well trigger an audit. So what does the prudent business owner do? He can forget about the deduction, prepare his own return, or he can retain an accountant who is not afraid to fight with the IRS. Unfortunately, all of these options are difficult. The Internal Revenue Code is complex, and very few accountants understand most of it. And the IRS has recently made the accountant into a policeman. Most accountants are honest and knowledgeable, but are forced to be cautious. They try to do what is best for their clients, but the IRS has recently made that almost impossible. Also, every year, the tax laws are changed to one extent or another, and accountants are constantly challenged to remain current, knowledgeable, and proficient.
In light of all this, you may want to test your accountant’s knowledge. Consider asking him the following questions:
1. Why have I not been using a 412(e)(3) plan or a captive insurance company to reduce my taxes and other expenses?
2. Why have not I been using a VEBA to reduce my health insurance costs?
3. Am I a good candidate for a K or double K to reduce taxes presently and provide for a secure retirement?
4. What strategies are you familiar with whereby I can legally deduct the cost of my life insurance?
5. Why have not you given me a copy of the IRS industry specialization report (which can be obtained free from the IRS) which shows the items that the IRS will be looking at in my business, both with respect to who will be audited and what will be looked at in an audit, and will provide me with a lot of other useful information?
6. Am I currently using any strategies that the IRS considers abusive?
You may be disappointed, but you should not be surprised, if you discover that your accountant knows little or nothing with respect to the answers to these questions.
If you don’t want the IRS to get every last drop, and if they come to visit you, which they may, you will be wise to utilize some of the information that you have just read. Unlike your accountant, your insurance agent-financial planner, and your other advisors, I write best-selling books for The American Institute of CPAs. If you have a great accountant, he has probably read some of them. If your accountant is an IRS tax collector, you may want to find one who will be your IRS protector. There are some of them out there, but many of them do not need you. They have too many other smart business owners that they are already helping. Do something now, both in terms of protecting your assets and reducing your taxes, before it’s too late. Things are going to get a lot worse. Maybe you can be one of the smart ones who learns how to take advantage of our current economic problems. People have made a lot of money with investments this year; my retirement plans and the retirement plans of my clients have all made money this year. Don’t believe your stock broker, other advisors or your mother-in-law.
It has been possible to make money, run your business more efficiently and profit in this current situation. You can either bury your head in the sand and pretend there’s nothing you can do, or you can take a few steps to get all your stock market losses back, substantially improve your current situation and protect your assets.
Many of you have received information about the current state of your investments in the past few months. Sticker shock would be an understatement. Thousands have been lost as a direct result of the fiascos constantly occurring as of this writing. The downward spiral will continue, as the shrapnel from these events moves throughout our failing economy. It won't stop in the foreseeable future, and it will entail more than just monetary losses. Trust me, no stone will be left unturned, including that of increased IRS audits for the express purpose of raising money, which in fact has already started.
In this day, the veil has been pulled back on the stock market's heavy hitters. Consumers now know there is indeed no "wizard" behind the curtain, just a few individuals in designer suits pulling down astronomical sums of money for the advice they send down from on high.
Consumers need advisors who can guide them toward a safe harbor. Financeexperts.org can give you the help you need in this failing economy. The leading authorities are members, and will most likely give helpful feedback. Consumers are fearful, and if they say they aren't, they probably aren't being honest. But things do not have to look and seem so bleak.
But when it comes to who will receive most of our compassion, my money is on the investors. We hate to have an "I told you so" attitude, but at times it is hard to avoid. However, rather than dwell on this compassion, why not capitalize on it? Often unforeseen opportunities arise from the ashes of situations such as these. In fact, many such opportunities are available as I write this. They will be taken advantage of by those with the imagination and talent to position themselves to do so.
By reading this, you may be off to a good start. There are many ideas you will get from our leading finance experts to better run your business, reduce taxes and insurance costs, and much more. You will learn how to avoid audits, which are already up fifty (50) percent and are expected to increase further still, and turn your accountant into your protector instead of a tax collector. You will learn from Lance Wallach, who, as an American Institute of CPAs instructor and course developer, teaches CPAs. Lance also draws upon the knowledge and expertise of his associates, who are the leading finance experts in the United States. None of them work for any of the firms that were affected by the recent and ongoing financial fiascos. Many of them perceived the arrival of these problems, and only their clients benefited because most other business people were too busy buying products from stockbrokers, insurance agents, and so-called financial planners who did not know what was going on. In Lance's spare time, between speaking at conventions, writing and helping a select few business owners, Lance appears as an expert witness.
In fact, for two days in Sept 2008, Lance Wallach testified as an expert witness in Federal Court for a business owner that was sold a faulty financial product by a combination of his accountant and a so-called retirement plan expert. After Lance completed his testimony, the judge called the retirement plan salesman a "crook" and said that he should settle with the plaintiff. He did not, and the jury awarded the business owner TWICE what he had sued for. As a side note, Lance had advised the lawyer that this was a so-called "ERISA case" and instead of the $400,000 that the business owner was suing for, $800,000 (double damages, as is possible in "ERISA" cases), could be awarded if the jury felt that was appropriate.
The point is that, under no circumstances, should you be forced to lie down and take the abuse and malpractice that most salespeople pin on you. Get your financial and business affairs in order, and, if necessary, take some action! Take some serious action!
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for any such advice.
By Lance Wallach, CLU, CHFCABOUT THE AUTHOR: Lance Wallach
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. He welcomes your contact.
Copyright Lance Wallach, CLU, CHFC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.