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The IRS has increased audits of small businesses by fifty (50) percent, so you better learn how to protect yourself.
Have a lot of zeroes after the numbers on the return. Amend the return. Take a low salary while operating as an S corporation or as a sole proprietor. Have unreported income, especially in cash. Live in an expensive house, or otherwise in visible opulence, while taking a low salary. That way, people can wonder, how you can afford that house, car, etc.
Let me clarify the statement in the preceding paragraph about having a lot of zeroes after numbers on a tax return. I do not mean high figures, since you must report income truthfully, of course. What I mean is that numbers that are too round lead IRS agents to think “estimate”, and this leads to unnecessary attention and scrutiny.
Make sure that your retirement plan is never updated as the law changes. Hire independent contractors, illegals, etc. Make use of an abusive tax shelter and/or listed transaction as a vehicle to reduce taxes. Seriously, you may be surprised to learn that many popular retirement and life insurance employee benefit plans fall into these categories.
If you are in a listed transaction, accountants now must report your participation to the IRS or face potential monetary fines and penalties in six figures, up to $200,000. Accountants and other tax return preparers also face increased penalties and scrutiny if clients take questionable tax positions or deductions. The upshot of all of this is that your activities, even if you are unaware that they are questionable, are increasingly likely to attract the Service’s attention, obviously making you a likely audit target.
Even now, however, there are still creative ways to reduce taxes and, for good measure, insurance costs. You might try renting a captive insurance company, which often greatly reduces both taxes and insurance premiums. Use of a health savings account can accomplish the same goals. A VEBA can do all of this as well as allowing the deduction, for tax purposes, of estate and business succession plans. Life insurance costs can be reduced through the use of a technique known as the insurance swapout process. Do you want to obtain insurance without a cash outlay? Use non-recourse loans. And, you can turn your life insurance into cash that you can use, without dying, by use of a life settlement.
These are just some techniques that, by applying just a few of them to your business, you could save thousands or even more. Above all, and more on this later, it is most important to find an accountant who acts as your tax protector instead of an IRS collection agent. Most accountants seem to simply return your tax return with instructions about how much to pay and where to send it. Only if pressed will they even be bothered to try to explain anything. You have to do better than that.
Returning for the moment to possible money and tax saving techniques, consider operating as a C corporation, which makes many otherwise non-deductible expenses deductible. Consider using a VEBA, 412(e)(3) plan or K plan to keep more of your own money in your pocket. Health savings accounts, captive insurance companies and life insurance swapouts can all reduce taxes and insurance costs.
There is probably not a business owner anywhere who does not think he pays too much in taxes. Most, in reality, actually do. Accountants have to “play it safe nowadays, which does not reduce your tax bill. On typical returns, tax preparers’ work is often subject to “interpretations” of the tax laws. Recent law changes may force preparers hoping to lower a client’s tax bill to be less aggressive with respect to these interpretations , or else they may risk substantially increased penalties. If a client insists on taking an aggressive deduction, the preparer, hoping to protect himself from sanctions, may include a form explaining the circumstances. This may protect the preparer while triggering an audit.
This understandably angers taxpayers who feel strongly about particular deductions. And these penalties do not apply to taxpayers preparing their own returns. But, of course, notwithstanding this, the more complex a return is, the more foolhardy it is to prepare it without professional assistance.
But the bottom line is that your accountant is reluctant to be aggressive any more, and is less likely to give you the benefit of the doubt on tax deductions. For example, if a client is participating in what is known as a “listed transaction”, both the taxpayer and the accountant must file with the IRS, alerting the Service to the taxpayer’s participation. A simple failure to file, for whatever reason, can result in a penalty of up to $200,000, as can incomplete, inaccurate, and misleading filings. These penalties apply to both the client and the accountant. All of this filing, of course, may well trigger an audit. So what does the prudent business owner do? He can forget about the deduction, prepare his own return, or he can retain an accountant who is not afraid to fight with the IRS. Unfortunately, all of these options are difficult or worse. The Internal Revenue Code is complex, and very few accountants understand most of it. And the IRS has recently made the accountant a policeman. Most accountants are honest and knowledgeable, but cautious. They try to do what is best for their clients, but the IRS has recently made that almost impossible. Also, every year, the tax laws are changed to one extent or another, and accountants are constantly challenged to remain current, knowledgeable, and proficient. In light of all this, you may want to test your accountant’s knowledge. Consider asking him the following questions:
1.Why have I not been using a 412(e)(3) plan or a captive insurance company to reduce my taxes and other expenses?
2. Why have not I been using a VEBA to reduce my health insurance costs?
3. Am I a good candidate for a K or double K to reduce taxes presently and provide for a secure retirement?
4. What strategies are you familiar with whereby I can legally deduct the cost of my life insurance?
5. Why have not you given me a copy of the IRS industry specialization report (which can be obtained free from the IRS) which shows the items that the IRS will be looking at in my business, both with respect to who will be audited and what will be looked at in an audit, and will provide me with a lot of other useful information?
6. Am I currently using any strategies that the IRS considers abusive?
You may be disappointed, but you should not be surprised, if you discover that your accountant knows little or nothing with respect to the answers to these questions.
Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. He welcomes your contact. E-mail firstname.lastname@example.org or call (516) 938-5007 for more info.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for any such advice.