There are few things Americans dread more than April 15th. The weeks and days leading up to the date are filled with stress and anxiety. Then we breathe a collective sigh of relief when the deed is done. That is, of course, unless you become the focus of an audit.
According to the IRS, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”
To say an audit is stressful and unpleasant is an understatement – not because of any wrongdoing on the taxpayer’s part, but because the scope of the investigation is very broad, and the IRS requests an abundance of documents.
Fortunately, the chances of being audited are low for most people. Less than 1% of all tax returns get audited. However, that rate can vary significantly, specifically for three groups of taxpayers: small businesses, closely-held businesses (those with five or fewer owners), and high-net-worth individuals.
HIGH NET WORTH INDIVIDUALS. Statistically, the IRS audits someone with a high net worth (someone with assets totaling at least $1 million) two to ten times more frequently than someone in a lower income tax bracket. And there are two reasons why:
- It is not unusual for high net worth taxpayers to use sophisticated financial, business, and investment structures to lower their taxes or avoid paying them altogether.
- A successful audit of a high net worth taxpayer means a higher amount of money the IRS may potentially collect.
SMALL BUSINESSES. Like high net worth taxpayers, the IRS tends to target small businesses because of the perceived notion that small businesses underreport income in an attempt to avoid paying taxes. Small business owners also tend to claim too many business expenses such as home offices, vehicles, business meals, entertainment expenses, and travel costs. Too many of these deductions, along with too many reported losses, can trigger suspicion.
CLOSELY-HELD BUSINESSES. Unlike large public companies, closely-held businesses are managed by family members, a situation that presents opportunities to disguise nondeductible payments into deductible employee compensation. In some cases, an employee might be paid an unreasonable salary for services provided in order to reduce the overall tax rate on corporate earnings.
If you are a high net worth taxpayer, small business owner, or the owner of a closely-held business, and you’re worried about your chances of being audited, Boris Benic and Associates can provide you with the tax audit help you need. Our group of tax experts understands the complexities of the auditing process and can help minimize your losses.