By
Jeffery
Rosenthal
-•eo ling with the IRS
It appears the Internal Revenue
Service is auditing three to four
times the number of returns for .
1982 as compared with prior years.
The style of the audit has been ·
changed somewhat. Rather than
check every item, they appear to
spot check items on the returns. So
the first three rules to follow are be
prepared, be civil to the auditor, and
be represented.
The auditor is either a tax
examiner or a revenue agent. The
agent has more authority and is con-
sidered more of an expert. If your
business is a corporation of partner-
ship, the audit will take place in your
office. If your business is a sole pro-
prietorship, the audit will be in the
local office of the Internal Revenue
Service. In addition to the review of
your tax return and records, the
auditor is supposed to observe you
and your daily business activity.
Make the auditor comfortable. If
possible, allow him the use of a pri-
vate office without a photo copier.
Any food or drink that is normally in
your office may be offered to the
auditor. Should you send out for
food, the auditor is obligated to pay
for himself.
The auditor may ask for: all of
the bank statements for the year;
your sales journal; your cash dis-
bursements journal; your check
book stubs; your payroll journal;
your business tax return for the year
previous; and the personal tax
returns of the individual principle
owners.
Just for the records, the IRS is a
division of the Department of Trea-
sury. The auditor will not read you
your rights; but, make no mistake,
what you say can and is often used
against you. Experts will tell you,
106
your mouth can be your biggest
enemy. So don't make idle chit chat.
Answer only the questions asked.
Don't expand the discussion unless
asked to do so. And be as brief as
possible.
The audit will likely take more
than one day. Next, should you find
yourself in disagreement with the
auditor on a particular item, tell the
auditor that you respectfully dis-
agree. Then ask him to continue
with the audit. If, early in the audit,
you get into a heated argument with
the auditor, you have just set the
tone for the balance of the audit.
Also remember if you don't like the
results you can always appeal. Try to
win as many subjects as possible.
Lick your wounds after its all over.
And then logic, facts, and law will be
your best help. Most issues not
resolved at audit are resolved in
appeal.
P ointers for operators
1. Since you're in an all-cash
business, the auditor will seek
unreported income. He will look for
inconsistent books, and income
recorded. Double sets of books will
very likely result in a tax fraud
admonishment. Tax fraud is punish-
able by fine andj or imprisonment.
2. The auditor will ask to see the
commission payments to your
accounts to see the 1099's that you
were required to file . For each 1099
required but not, in fact filed, you
will be fined $50. A 1099 is required
for each non-corporate account that
you pay more than $600 in a year.
3. The auditor will check to see
if your travel and entertainment
expenses include personal or unsub-
stantiated deductions. The auditor
wiii also check to see if your expenses
deducted for reimbursements to
routemen and or salesmen also fully
meet the substantiation and docu-
mentation requirements.
4. The auditor will verify all of
your capital purchases for machin-
ery, autos, and equipment to verify
proper depreciation and investment
credit. If any of your old machinery,
autos, or equipment were sold, any
recapture of depreciation and/ or
i·nvestment tax credit should be
calculated.
5. The next bone of contention
will be the owner's use of company
cars. The auditor will look for per-
sonal use of the business auto. Sorry
no deduction, for personal use of
company-owned autos. If your com-
pany autos are leased, relax, your've
got nothing to worry about.
6. Effective January 1, 1985,
some fringe benefits will have to be
added to owners/ employees income.
This will be the subject of future
articles.
The auditor W'ill press to close
the audit as soon as possible. This
should be fine with you, unless you
have a disagreement on a specific
subject. Then you will need extra
time to prove your case. If the
auditor doesn't want to wait and
issues a report, you have 45 days to
either accept or challenge the
report.
The auditor is graded on how
fast he can close a case. You can
reverse the intimidating process by
waiting to the last days. The
position of the auditor may soften as
you approach the end of the time
period. And that brings us to the
next rule: Engage your brain, before
you open your mouth.
The final rule is simple: Remem-
ber the other rules.
•
PLAY METEP., April 1 , 1985