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IntraScope Accounting Solutions, LLC

 

 

June 2004 Edition

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It has been a while since you have received a newsletter from me. I want to dedicate this newsletter to updating you about changes in the IRS and the auditing process. I hope you are enjoying your summer and all is well.

 

INTERNAL REVENUE SERVICE

 

The IRS has made auditing a priority again. It has asked for more money and more revenue agents and will get it. Congress is angry about the widespread use of tax shelters by corporations and high-incomers stashing income offshore and has told the IRS to step up the audits.

 

The IRS will be focusing on the following:

  • S corporations - Auditors will be looking for payroll tax abuses where owners take most of the profits as dividends instead of salary.
  • Upper-income taxpayers - Taxpayers who do not file or are using tax shelters to improperly reduce taxable income will be targeted.
  • Self-employed individuals -- Auditors will be looking for unreported income and personal expenses taken as deductions. Filing as a sole proprietor (schedule C) triples your chance of audit compared to individual income tax payers because the IRS has found questionable deductions in their examinations.
  • Earned income credit - The IRS is requesting additional documentation to support the earned income credit taken by lower income taxpayers. Surprisingly, there have been a substantial number of adjustments reducing the credit taken by taxpayers.

 

WORDS OF WISDOM FROM A RECENT AUDIT

I recently had a client audited by the IRS that was - you guessed it - a sole proprietor. Here are some helpful hints to help you through a no change audit in case your lucky number comes up.

1. Determine a reasonable portion of your cell phone that is personal and reduce your deduction by this amount. According to our auditor, the IRS will not challenge your allocation between personal and business use. Otherwise the agent will review your cell phone bills and determine your business usage. Once they have determined the percentage, it is difficult to get them to increase the business use.

2. Meals and entertainment were reviewed. The auditor did ask for documentation -- who and what was discussed.

3. Any related party transactions, (loans from relatives or leases with related companies) need to be documented in writing.

4. Issue 1099's. This indicates to the IRS these payments are bona fide business deductions and you have tried to follow the rules.

5. If you are deducting credit card interest on your schedule C, make sure you are only deducting interest on business charges. If you also charge personal expenses on the card, the IRS will allocate some portion of the interest to personal nondeductible interest.

6. The auditor picked the 4 highest deductions and only looked at those expenses. However, the auditor looked at every expense item in each account.

MILEAGE RATE FOR 2004 WILL NOT CHANGE

 

The IRS has indicated it won't increase this year's mileage rate of 37.5 cents per mile mid-year even though we are getting killed at the pumps. The rate for 2005 will reflect the 2004 increase in prices.

 

DID YOU KNOW.....

 

According to the Denver Post, 25 % of taxpayers believe their taxes were higher in 2003. Trust me, the only way your taxes increased last year was if your income increased. If we were to run a comparison of your 2003 income using the old tax law and the law in effect in 2003, you paid less in 2003 with the new tax law. The best changes: lower tax brackets and the elimination of the marriage penalty.

 
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