The Flooring Contractor
Official Publication
of FCICA
How To Get Audited
How Much Money Have
You Lost Today?
By Lance Wallach
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 fiascoes 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 fiascoes. 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!
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. E-mail lawallach@aol.com or
call (516) 938-5007 for more info.
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.
