The good news: The IRS reportedly is easing up on audits of small businesses. If you had assets of less than $250,000, you had a 0.75 percent chance of being audited in 1998, compared to a 1.16 percent chance in 1997, according to TRAC Reports Inc., a data gathering, research and distribution organization. Businesses with assets between $250,000 and $1 million had a 2.49 percent chance--down from a 3.49 percent chance in 1997.
The bad news: The IRS may be more likely to scrutinize your returns if your small business is paying taxes for the first time or if you're self-employed. If you haven't paid taxes in past years because you didn't generate profits until now, there's a good chance the IRS will question your not having paid quarterly estimated taxes in 1999. Not having owed taxes the previous year is no excuse. You may or may not be hit with penalties.
IRS guidelines on quarterly estimated tax payments are complicated, so consult your accountant or tax attorney. If you expect 2000 to be your first profitable year for tax purposes, have your accountant schedule quarterly payments now to preclude IRS hassles next year.
Even more closely watched are the self-employed. If the agency audits you, it can access your bank statements and other financial records that may reveal any unreported income. According to Nolo.com, a publisher of self-help legal aids, the IRS will probably want to know:
- Did you report all business sales and receipts?
- Did you write off any personal expenses as business expenses?
- Does your lifestyle exceed reported income?
- Did you write off car expenses that were not businessrelated?
- Are you reporting all cash transactions--especially large transactions?
- Did you claim large business entertainment expenses?
Paul deCeglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.