SmallBizLady: Dawn, what could trigger an IRS audit?
Dawn Brolin: Dawn Brolin: First, let me give a disclaimer – nothing guarantees you will be audited these are simply recommendations.
- Unreported Income and Cash Businesses – you cannot simply file a small business gross revenue on the 1099’s you have received.
- Foreign Bank Accounts – if you deal in foreign currency and have business overseas and don’t report it on a FBAR
- Home Office Deduction – Claiming 35% business use of your home – an exclusive use of an area of your home is for your business, not your kitchen table.
- Business Losses – repeatedly reporting a business loss each year and you cannot substantiate or prove you are truly investing time and money
SmallBizLady: What happens if the IRS suspects a business owner of fraud or criminal wrongdoing?
Dawn Brolin: Dawn Brolin: If the IRS has been “tipped off” from a disgruntled employee, divorced ex, or a former partner reporting wrongdoings and making “a deal” with the IRS. Although, difficult, the IRS has to prove that you have intentionally made a decision to evade taxes. It may start with a civil audit, meaning, the IRS is just trying to understand what you have reported on your return. In many cases, audits result in a “no change,” meaning they wanted proof of what you reported.
SmallBizLady: What should you do if the IRS decides to pursue your business criminally?
Dawn Brolin: NEVER talk to an IRS agent who knocks on your door. Take their card and call a tax attorney immediately. Just because they pursue you doesn’t mean you have done anything wrong. Don’t take it lightly and make sure you line yourself up with a reputable tax attorney, not a 1-800 number!
SmallBizLady: Is it possible to have client/accountant privilege similar to that with an attorney?
Dawn Brolin: The simple answer is yes but it cannot be privileged if you, the business owner, have committed a criminal and fraudulent act to evade paying your taxes. If you are investigated criminally and engage an attorney, they can protect an accountant from the IRS – typically this is not your tax preparing accountant. Of course, you always have your 5th amendment right, but use that strategically!
SmallBizLady: What is the difference between business Tax Evasion and Tax Avoidance?
Dawn Brolin: Tax Evasion is the absolute intentional “cooking the books” and the willfulness to evade your tax obligation. Tax Avoidance is a legal ability to minimize your tax “exposure”, or, “taxes owed”.
SmallBizLady: Dawn, I’ve always heard “don’t mess with the IRS.” Should I negotiate with them directly?
Dawn Brolin: You would be surprised how much more flexible the IRS is compared to your state taxing agencies. The IRS can be very serious if you ignore them. If you respond and communicate you can avoid any harmful actions.
SmallBizLady: I’ve heard where the IRS has frozen business and personal accounts, why is this done?
Dawn Brolin: Your account isn’t frozen, it is “levied”, meaning a one-time clearing of the money in your account. Unless you do not respond to the levy. JUST COMMUNICATE! This typically happens because when an IRS notice arrives, most people don’t even open the envelope for many months. Ignoring a notice is not a good idea. If you do not make a payment arrangement or communicate you can be levied, meaning you can have your bank account levied.
SmallBizLady: What options does a business owner have if their accounts are frozen, for example getting money to meet payroll?
Dawn Brolin: If you are at a point where the IRS is levying your accounts, you MUST engage a professional. Again, not a 1-800 person but rather a professional who you can contact, the same person, not a random one. Don’t put yourself in a situation where you cannot pay your payroll or your payroll taxes. Take your business as serious as oxygen, your family, and your health. Do not get in a position where you are worried about meeting payroll obligations.
SmallBizLady: What type of proof is requested, acceptable or required to satisfy the audit?
Dawn Brolin: DOCUMENTATION – your documentation on expenses is critical to your position with the IRS. Do not assume that anything under $75 doesn’t require a receipt, always keep your business expense proof. The IRS will accept an electronic copy of a receipt, do not assume the IRS will accept the simple credit card or bank statements, they want to see what you are spending your money on.
SmallBizLady: What happens if you cannot produce business-related documents?
Dawn Brolin: The IRS has to be “reasonable” in their acceptance of potential recreated information. You cannot produce $500,000 in revenue, at no cost. Keep in mind, with technology today, you have limited excuses to retain expense documentation. Get yourself positioned NOW by using electronic and mobile business devices for recordkeeping.
SmallBizLady: Exactly how long does an audit take?
Dawn Brolin: An audit is a process. It can take from 3 months to 3 years. It 100% depends on your ability to support your small business revenue and expenses. It is SO important to keep your records. The proof is on YOU. Small business owners are not W2 employees. There is an inherent responsibility that you take on when starting a business. Be patient, and DON’T freak out – hire a professional.
SmallBizLady: Can I be audited again and what advice can you give?
Dawn Brolin:
- You can be audited again, yes.
- Minimize your flags.
- Keep good records.
- And, work with a true professional.
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