The tax profession industry is regularly given updates of the areas that the Internal Revenue Service will emphasize in the near future. The IRS doesn’t keep these areas secret. Especially in compliance, they want all of us to know what they are going to be looking at in audits and the areas they are going to emphasize in their educational efforts.
I have noted in past articles that the current tax gap runs about 450 billion dollars. Right or wrong, it is presumed that small-business underreporting accounts for a significant portion of this 450 billion. Based on that premise, it’s no great surprise that small business bears the brunt of IRS compliance. According to recent IRS communications as compiled by Beyond 415, a tax professional educational resource, here are the eight small-business compliance areas the IRS will be looking at through the end of 2013.
First, they are going to look at the reporting of an employee’s, specifically the owner’s, personal use of company cars. This personal use is to be reported on either a 1099 or directly on the employee’s W-2. While looking at past audits, it was found that, as a whole, small-business employers don’t do a good job of reporting the personal use of company cars on any form. The overall area of fringe benefits including medical insurance, medical expense reimbursement plans, and retirement plans reporting will also be looked at.
Second, as I noted in last week’s article, generally high income/high wealth taxpayers will draw special scrutiny. Using the IRS’ current definition of high income/high wealth, taxpayers with positive income of $200,000 meet the definition of high income/high wealth. Positive income is defined as gross income or sales income before all expense deductions. Specifically, the IRS says they will focus on Schedule C Sole Proprietors who have positive income or sales of more than $1,000,000. More of those taxpayers can expect to be audited.
Third, the IRS is going to match 1099-K reporting with tax returns. A 1099-K is used to report credit card transactions that are cleared through a financial institution. An example might be transactions cleared through eBay. These will be reported to the taxpayer via a 1099-K. The taxpayer then reports these transactions on a business return, quite possibly a Schedule C. The IRS’ presumption is that there may be a tremendous amount of transactions not being reported anywhere. Look for matching letters to start showing up next year.
Fourth, beginning in 2010, small-business taxpayers who provided health insurance to their employees might have qualified for a Small Business Employee Health Insurance Credit. It is a substantial credit. It is a complicated credit to compute. The IRS will examine tax returns that claimed the credit to ensure the computation was correct.
Fifth, the IRS will continue to investigate international transactions. Taxpayers who attempt to hide assets overseas are in serious trouble. There have been several rounds of voluntary compliance with associated amnesty periods. The days of amnesty are most likely in the past. Hide money overseas and you will be in trouble.
Six, partnerships who claim large losses on filed returns will be investigated. The IRS will be checking for abusive tax shelters that generate large deductions and credits against very little income. That may sound good in theory, but it’s a fine line and many abusive tax shelters pass over the line to illegality.
Seven, S Corporation returns with losses on their returns and that loss is subsequently claimed by the shareholders will receive scrutiny to determine if the shareholders are allowed to claim the loss. In addition, shareholder owner-employees who receive little or no salary but do receive profit distributions will receive special scrutiny. Sub S shareholder owner-employees must receive reasonable compensation as reported on a W-2 and, in most instances, are not allowed to receive only profit distributions and no salary.
Eight, employers will continue to be audited to determine if all workers are properly classified. A worker can be classified as an employee or a subcontractor. Employers save approximately 30% in payroll tax costs and fringe benefit costs by classifying a worker as a subcontractor. That is quite an incentive. However, there are many factors used to determine if a worker is an employee or a true subcontractor. The IRS will audit business returns looking specifically at the subcontractor versus employee issue.
The bottom line is that our presidential candidates both say they believe small business is the backbone of America’s economic recovery. The IRS may also believe that is true, however, it also maintains they are responsible for the nonpayment of billions of dollars of taxes. In this instance, the IRS has more power than the presidential candidates.
Apparently, we will see more small-business audits in the next few years. The IRS doesn’t just release these types of alerts for an exercise. My experience is they mean what they say and will follow up on the alert. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent and Registered Tax Return Preparer. He owns Action Tax Service in
Rockford on Northland Dr. Contact Jerry
through his website: www.actiontaxservice.com.