A disturbing trend is emerging from the IRS– they are targeting more and more small businesses for examination (audits). According to a Syracuse University study, the IRS has increased audits on small businesses 41% since 2005. The IRS is getting bolder, more aggressive, and small businesses are losing. But did you know that good records can save your hide in an IRS audit, and sometimes even “pay” you back? This article explains how.
The worst part of all this is the IRS’ increasing use of the 6694 and 6695 penalties, which are applicable to professional preparers who the IRS has deemed as having “overstepped their bounds”. Even ethical preparers are afraid of getting hit with this penalty, so preparers are more and more reluctant to take deductions for their clients, even legitimate ones. These penalties apply even if a client doesn’t pay their bill– just the fact that a preparer intended to charge the client is enough.
The best remedy for this is just plain old good record keeping. Moving to a completely electronic method of bookkeeping is the key. Scanning receipts, entering transactions in Quickbooks, and keeping an adequate paper trail are the key to success in an IRS audit.
Deductions that are harder to substantiate, such as mileage logs, should be kept on a computer and have back-up, such as copies of google maps or Mapquest driving directions. The IRS likes to question mileage deductions because they know that people tend to keep poor records of their mileage. The deduction for mileage is such a great one, too– it is as if the IRS is giving away free gas to those who keep good records. Case in point:
If your vehicle gets 18MPG, then the 2008 IRS standard mileage deduction of 50.5 cents/mile will give you $9 in tax deductions for every gallon of gas you buy! (Just multiply 18 miles/gallon times 0.505 dollars/mile!) This means that at even the lowest combined Federal and State tax the IRS is paying for your gas! All you need for this free gas is an IRS conforming mileage log! -MileageWiz Website
I recommend a good mileage-tracking software like MileageWiz or an actual mileage tracking device like Mileage Logger.
The Mileage Logger is about half the size of a dollar bill and plugs into your vehicle’s lighter power adapter. The device uses the power of GPS to calculate and record trip distance. This information is transmitted to the company website through cellular networks. The mileage report is then accessible on the web using a secure user name and password. -SBTV.com
Keeping good records saves money, saves time, and in the case of the mileage deduction, may even pay you back! So help your business and your tax preparer by keeping good records and tracking your mileage and other business expenses. You’ll be glad you did!
Christy Pinheiro is an Enrolled Agent and holds a Bachelor?s degree from San Jose State University. She was a staff accountant for a private CPA firm and also for the State of California before going into private practice. She is a Member of the National Association of Tax Professionals and the Association of Certified Fraud Examiners. Her finance and tax articles have been published in numerous periodicals. She is the author of Pineapple Guides? IRS Enrolled Agent Exam Review book series. Christy has an active tax practice in Sacramento CA, where She lives with her husband and two children. See her website at http://www.ChristyPinheiro.com and subscribe to her tax blog, http://thetaxblog.blogspot.com/ or her UFC Fan Blog at http://malebodybuilding.blogspot.com/ at Blogspot.
