Local communities and state and federal governments are reeling from significant reductions in tax revenue. Revenue sources that flow to the coffers of government agencies have sunk to new lows.
Even so, business owners working to bolster cash flow to operate profitable businesses are focused on reducing unnecessary costs and limiting risk. They have no interest in hearing about tax increases from the government. Elected officials know that discussing and ultimately voting in favor of tax increases is surely the kiss of death to their re-election hopes.
Here lies the conundrum. The answer: Simply increase taxpayer compliance – and that is exactly what taxing authorities are attempting to do.
The fact that businesses potentially face more audits is not welcome news. There is no such thing as an easy audit. Preparing for an audit requires reviewing records, preparing documents, meeting with management, and possibly outside experts, to determine the likely risk. Businesses that do not invest the time to properly prepare by understanding the issues open themselves up to greater peril.
You and your business are a revenue source for the various government agencies. Most taxpayers live in the comfort of their own misunderstanding of tax collection, proper filing and complying with tax laws. It is important to remember that the goal for the auditor is to collect all tax possible.
A business owner facing a sales tax audit believes he has no worries because his business is not subject to sales tax, and besides, the statue of limitations is three years so what could he possibly owe. Unfortunately, the statue of limitations is three years on filed returns, and seven years if returns have not been filed, more than doubling your exposure. Not only is the exposure greater, but the penalties, and then interest on taxes and penalties, will likely double any tax you owe.
Here are some of the important items you need to know about audits during this push for increased compliance:
Professionally Trained Auditors – There was a time when various tax auditors were trained on-the-job with a few supplemental courses. Today's auditors have much more sophisticated training, and have access to resources to easily download your information. With spreadsheet programs, a trained auditor can slice and dice your data focusing on likely areas that can find delinquent taxes.
Electronic Data – Paper records are almost nonexistent, with more records being stored electronically. This is great for you and auditors. Yes, auditors can request access to your electronic records.
Multiple Audits – The audit notice may be for wage and withholding but auditors are trained to discover other possible audit issues. What appears to be a harmless audit can lead to other areas. From the taxing authorities' perspective, a wage auditor who finds an income tax issue becomes a champion for expanding an audit with potential for more taxes, penalties and interest.
Persuasive Stories – Everyone has a persuasive story of why something was done. Like the highway patrolman, auditors have heard every story, excuse and rationalization, real and imagined. If the taxpayer is honest and sincere, some auditors will not assess a penalty. However, with pressure on taxing authorities to collect money, this generosity is being reviewed by the auditor's manager to assure the taxing authority gets its full measure of money owed. Further, the business owner will not only be compliant but will tell his business associates of the likely risk of being caught and thus tax compliance is reinforced.
The Defense – Locate and review your records and assess the risk. If you believe you have done everything according to the law, check with a professional to determine if your assessment is correct. Sometimes, you may have a difficult time being critical of your own work, records and compliance with the law. You do not want to assume you have NO risk only to find that the risk is significant. If you need more time, reschedule the audit to give sufficient time to get ready. There is no such thing as an inconsequential audit. An audit can tie up the business for weeks and have spiraling costs, even after the auditor is done. A familiar legal adage says that anyone who attempts to defend himself in court has a fool for a client. Do not be foolish. Know when you should seek professional help.
The Audit – Rarely is it recommended that businesses handle their own audits. Even sophisticated businesses with experienced personnel are not up to date with tax audit techniques. They may have the training but without current experience it can be a costly experiment. Whenever possible, the audit should be conducted away from the business office to avoid letting the auditor have open access to employees, records, and management to ask about and pursue new areas.
Audit Myth – There is a myth circulating that tax authorities conduct random audits just because a taxpayer's number is up. In actuality, these agencies have abundant resources and sophisticated tax programs, with the ability to share information and match data. The agency auditing your business is pushing tax compliance, and with reduced revenue sources, any outstanding tax, penalty and interest will be uncovered.
There is no question that in today's business environment you are more likely to be audited. With the business disruption of preparing for an audit, and the cost of taxes, penalties and interest, take the steps to conduct your business affairs in such a way that your records will withstand the scrutiny that comes from an audit.
Thomas Jefferson said, "Fear can only prevail when victims are ignorant of the facts." It is up to you to conduct your business affairs to pay the least amount of tax, even if you are audited.
