The Audits Are Coming!
With an increased enforcement budget, the IRS is threatening to conduct more audits. Should you be worried?
By Julie Monahan •
Opinions expressed by Entrepreneur contributors are their own.
Resisting any moves toward tax hikes, the Bush administrationwants the IRS to step up enforcement, presumably to help offset theballooning budget deficit. That could mean more audits forindividuals and businesses, a daunting prospect for busyentrepreneurs.
In February, the administration asked Congress for an extra $500million for the IRS, raising the agency's enforcement budget to$6.89 billion--a 7.8 percent increase over last year's budget.Many observers, however, dismiss the increased funding as simplesaber rattling.
According to the Transactional Records Access Clearinghouse, aresearch center at Syracuse University in Syracuse, New York,despite several years of IRS claims of crackdowns, business auditshave steeply declined since 1996, from 5.6 audits per 1,000business returns to 2 audits per 1,000 returns in fiscal year 2003.Even businesses caught cheating don't face much punishmentbeyond paying what they owe. TRAC statistics also show that thenumber of penalties levied against corporations fell from 62 in1999 to 12 in 2003, while civil fraud penalties dropped from 247 to170 during the same time period.
These days, an audit isn't always a tense, face-to-faceencounter with an agent. A letter from the IRS saying you addedwrong also counts as an audit, at least in the eyes of the TreasuryDepartment.
While it appears that the chances of being audited remainsomewhat slim, you can further reduce your vulnerability byavoiding tax shelters, which are the subject of increased scrutiny,as well as deductions that are unusual for your industry. "Onething I tell taxpayers is, 'Be consistent,'" says JohnMaddox, a CPA with Maddox Ungar PLLC in Bingham Farms,Michigan.
In the event you do face an audit, Maddox suggests thatrestraint is your best ally, next to your accountant. Provide onlythe information the IRS specifically asks for without goingoverboard. The main thing is not to panic. "Just because theIRS asks about something," Maddox says, "doesn't meanyou've done anything wrong."
