An interesting corollary prospective has arisen following the IRS scandal that used political opinion to target small groups applying for tax-exempt status. That companion issue is whether the IRS has unfairly leveled extra scrutiny based upon taxpayer size. The congressman who chairs the House Small Business Committee recently sent a letter to the acting IRS commissioner asking how small businesses are selected for tax audits.
This subject has implications for Enrolled Agent tax work. Rigorous IRS examination of small proprietorships signals potential opportunities to represent more entrepreneurs confronted with IRS challenges. At the least, aggressive inspection of small business tax reporting implies a need for EA advice about maintaining sound record keeping systems. When the IRS calls for substantiation of tax return figures, high quality records are the only defense.
Budget cuts at the IRS have caused layoffs and closure days. However, this only motivates the IRS to focus on examining areas where tax underpayments are most likely found. While the number of field audits is declining, much higher volume of computer-generated correspondence is occurring. Although devising responses to these notices are common Enrolled Agent jobs, avoiding the initiation of an IRS assessment is even more desirable.
Small businesses are the most common situations where the IRS finds taxpayer errors. Hiring a tax expert is the best path for proprietors to prevent IRS inquiries. Hence, many entrepreneurs call upon professionals with knowledge from passing the Enrolled Agents exam. An EA is qualified to carefully prepare tax returns plus deliver advice about documenting deductions.
The IRS has remained silent about how it selects taxpayer audits or correspondence investigations. Still, business owners claiming large deductions relative to income are ideal marks for inquiry because requests for supporting evidence are so easily issued. Moreover, special tax rules apply to certain types of business expenses. This demands the attention to detail addressed during Enrolled Agent training.
Among the categories of business deductions with distinctive features are meals and entertainment expenses. Also open to IRS criticism is incorrectly substantiated business use of a personal vehicle. A commonly cited problem is failure to identify capital expenditures and properly apply tax depreciation percentages over several years. Consequently, vigilant attention during an Enrolled Agent study course to tax subjects concerning proprietorships is vital for learning how to protect taxpayers who own businesses.
Specific industries frequently incur IRS examinations. These sectors of the economy often receive payments in cash or make disbursements in cash. Transactions of this nature are difficult to trace. Although that invites tax cheating by some, most business owners are honest. However, their bookkeeping can become sloppy when accounting for cash items. Another problem is payment of business expenses with personal funds and reimbursing later. Enrolled Agents will find plenty of small enterprises requiring attention over poorly controlled factors to achieve clean standing with the IRS.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.