Thursday, July 22, 2010

Do you feel lucky, Punk?

While statistically speaking your chances of being audited by the IRS are very low, It is important to prepare each tax return as if you will be audited. Having proper documentation for expenses claimed and being certain to declare all income items is far more effective if you do the work when its fresh in your mind and the records are available. Waiting two or three years to put this stuff together can torpedo your chances of prevailing in an audit if you no longer remember who was at that business meal, or where you put all those receipts.

Some people play the odds game and bank on never being selected for audit. This can be a great time saver initially, but often will backfire if you’re the one selected. It’s sort of like being deployed to Afghanistan. The death toll in that war is relatively low, but of little comfort if you’re the unlucky one.

A year ago we had one tax examination going on in our office. Right now we are defending about six. Further, IRS is expanding its auditing of payroll tax returns (and independent contractor status) and has begun to audit 2000 small businesses each year on employment taxes. One of the rumors that came out of the Obamacare debate was the mandate to hire thousands of new IRS agents to enforce all the tax provisions. This was hotly denied, but seems a logical result of increased taxes and more government mandates.

So if you want to play the audit lottery and have inadequate records, I would refer you to Clint Eastwood’s famous exchange from the movie Dirty Harry while pointing a gun to the head of a bad guy: “Do you feel lucky, Punk?”

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