| | | © McCauley, Nicolas & Company, LLC | Upcoming Events | Autumn 2008
Go back to E-letter | Printer-friendly version | | Tax TipsMike Grinnan,
CPA, CITP, Partner | The IRS Wants You!Wouldn't it be great to know you were going to be selected for an audit before your return was prepared? You could cross every "t" and dot every "i" and have a complete file with documentation ready to produce. The Internal Revenue agent calls to give you the news, and you calmly respond: "No problem, when would you like to meet?" You arrive at your arranged appointment time and hand over the complete set of supporting documents proving every penny of deductions on your return. The agent smiles at you, says "thank you" and rewards you with a "no change" audit report.
Unfortunately, dealings with the IRS are often not so simple and idealistic. There are three areas the Service is targeting which can involve more than just documenting the dollars to ensure the related deduction.
One area of focus affects real estate investors. Individuals that can claim real estate professional status and who meet the criteria for material participation can receive special tax treatment for investment activities. To qualify as a real estate professional, you must be able to demonstrate that more than half of the personal services performed in trades or businesses during the year were performed in real property trades or businesses in which you materially participated. In addition, this "more than half" must total over 750 hours. If you own multiple investment properties, you must accumulate 750 hours per property unless you make an election with your return to treat all of your properties as one activity. The IRS will be checking to see if you made that election. If you fail to provide sufficient proof of your hours, you could forfeit your current year deduction for real estate losses against wages and other income. What can you do? Be prepared by documenting your time spent on all real estate activities. Save your calendars and appointment records showing meetings, closings, repairs trips, etc. In addition, make sure you have made the election to treat your various properties as one activity.
The second target involves small business owners. The IRS has always been concerned about small sole proprietorship (Schedule C) businesses under-reporting income. Effective January 1, 2011, the new Housing and Economy Recovery Act of 2008 will require debit and credit card processors to report merchants with gross receipts over $20,000 or more than 200 transactions in a year. The IRS will be matching that information to income tax returns to determine if there has been an under-reporting of income. The best advice is to report all income and be prepared to support all related deductions. Certain small businesses may be able to reduce the likelihood of an audit by changing their entity type to a partnership, corporation or S-corporation. The cost of such changes should always be weighed against the benefit.
The third target involves anyone hiring independent contractors. Many businesses utilize independent contractors to provide services such as office cleaning, legal services, web design, etc. The IRS is focusing on those treated as independent contractors but who meet the general conditions of employees. According to the IRS, "Employers who misclassify workers as independent contractors can end up with substantial tax bills as well as penalties for failing to pay employment taxes and failing to file required tax forms." The main factor determining employee vs. contractor status is "control" by the employer. If the employer can exercise control over the financial and business aspects of the worker's job, such as how and when the job is performed, then an employee relationship may exist. True independent contractors will usually be able to provide evidence of independence, such as insurance coverage, business cards, advertising, risk of profit/loss on the jobs, etc., and will have substantial control over how the job is performed. Small businesses need to be aware of the issue and ensure they are classifying workers properly.
We can help you understand these issues fully, position your business to minimize the risk of selection for audit, and if you are selected, make sure your records are in order. Email Mike Grinnan at Mike_Grinnan@mnccpa.com | | | | © McCauley, Nicolas & Company, LLC | Autumn 2008
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