Keeping Under the Radar of the IRS
Company cars and other such fringe benefits. There are very specific rules for how companies should treat fringe benefits for their employees (including their owner-employees).
- Taxpayers with high income and/or high wealth. Throughout last year’s election campaigns, you heard that income of $250,000 makes you wealthy. Well, it also makes you an IRS target! This is especially true if you have a sole proprietorship (Schedule C). The IRS audits over 12% of all Schedule C businesses with over $1 million in GROSS revenue.
- Employer tax credits. Under Obamacare, certain small businesses are entitled to a tax credit for providing health insurance to their employees. They get to have IRS scrutiny for it also!
- Foreign transactions. This one has been heating up for the last few years, and continues to get hotter. The IRS “knows” that people and companies are “hiding” money and income outside the US. They’re coming for those people!
- Partnerships and S-corporations with large losses. The IRS is afraid that these losses are tax shelters or hobbies or otherwise exaggerated. They’ll be looking at all the related expenses.
- S-corporations with any losses. In order to deduct these losses, the owners must have sufficient basis (investment in the business). This is a very complicated area, and the IRS “knows” that many taxpayers aren’t doing it right. Many probably aren’t, but we can help you keep the necessary records and do it right.
- Compensation of owners. The IRS is concerned that C-corporations pay their owners too much (thus avoiding corporation level taxes), and that S-corporations pay them too little (thus avoiding some Social Security taxes). Proper documentation on how such compensation was determined is very important!
- Worker classification. Do you know when someone should be paid as an employee and someone should be paid as an independent contractor? The IRS knows and they’re going after the companies that are doing it wrong.
- Not reporting all income. The IRS has many ways to track income. Don’t under-report it! Same goes for cash businesses. The IRS is looking for hanky-panky.
- Large meals and entertainment deductions. You need to have proper support for how these expenditures relate to business.
- “Red flags”. This term refers to items that don’t make sense. For example, if income is $100,000, does it make sense that mortgage interest is $40,000? If husband is an attorney and wife is a doctor, does it make sense that their total income is only $100,000? Don’t get us wrong. This could absolutely be the case based on your circumstances. But, you better be prepared with a good story to explain it.
We are here to help you navigate these troubled waters and to help you protect yourself. Call on us with your concerns.
Marcelo Sroka – is a Tax Partner at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.