There is not a yes or no answer to this question. Based on a recent estimate, 17 percent of taxes went unpaid, totaling $450 billion according to a recent IRS study released. This data actually dates back to 2006, but I doubt it has changed much since then. This amount exceeded the federal deficit at that time. And you and I were concerned that time we forgot to mail a check.

There are calls for lawmakers to reform the tax code and calls to recover these overdue funds. Neither of these challenges is simple for sure. While this is only a one year figure, the IRS estimates that they were owed $2.7 trillion as of 2006.

The W2 program works fairly well with compliance high. The IRS estimates the bulk of this shortfall comes from small businesses, renters, and businesses selling property. Conversely, the 1099 program does not function as effectively as many do not know who to issue them to or just do not do it. If a homeowner has someone do work on their yard, do they really understand how to issue a 1099? Apparently not. “Offer and Compromise” is designed for taxpayers to short pay their obligation with an agreement to stay current on taxes for the next seven years or risk having the compromised taxes being added back to the taxpayers account. This program does not seem to have a high success rate and there are several reasons for this. There are complex rules for how much the IRS will accept and many factors are taken into account. There are IRS programs to deal with this, the primary one being the offer and compromise program.

One significant reason is likely untrained taxpayers trying to submit offers that do not qualify per their guidelines. This makes choosing the right CPA to evaluate your financial books so crucial. It can cost several thousand dollars for a tax attorney to determine what the minimum offer should be. The submission process can take multiple times with no guarantee of acceptance. The translation is IRS does not have to accept an offer that meets their guidelines. Comparatively, would any of us accept less than 100 percent on a deal if you were not absolutely sure you could get more? Likely not, so the IRS is no different. Age, prior earnings history, health, and industry trends are all taken into account. Additionally, net assets in place at the time are also added to expected future cash flows from earnings. If you own an asset that can be sold for $100, they want this added to the equation for the minimum offer. Now we know there is much disparity between FMV and a quick sale, and this is some of the work an experienced person will assist with.

We utilize a tax attorney for our clients considering this direction, as this is all he does and has the experience needed and his knowledge increases the chance for success. Better to be old and destitute, versus young and able to create earnings over a long time period for this task. For a business, payroll taxes are also eligible for this, so virtually all taxes are game for this.

I have seen certain scenarios that seem to lead towards owing the IRS large sums. A taxpayer that has an unusually large year ends up having more income taxed at higher rates and the event does not repeat. With this windfall, the owner normally wants to build an infrastructure to allow future earnings to occur. There may be a home to purchase, which also may not leave room to fully pay all taxes. The intent to catch up is normally there, but this may never occur. The other scenario is the business that is not profitable and does not have access to credit. The unpaid payroll taxes become the credit line that has unlimited capacity to increase with no current payments needing to be made. An IRS audit over several years may also result in a large tax balance all at once, and income now may not be the same as when the audit adjustments occurred resulting in not having enough to pay the IRS. While they are flexible on payments if the balance is large enough, catching up can be daunting with interest and penalties mounting.

Once large tax balances occur, many taxpayers get good in becoming elusive to the IRS by working under the table, having relatives or friends own assets, and not showing any noticeable wealth. Many taxpayers who live in a cash world never report all income, thus substantially understating taxes due. Taxes seem to bring the worst out in many people and cause extreme actions. Just a little glance into the unpaid tax world. Final advice, seek help as fighting the IRS is tough without the right team.

Avoiding an IRS Audit
May Not Be So Easy For Top Earners

There are things that make us more likely to be audited by the IRS. Apparently being a millionaire is one of them. 12 % of these returns were audited for 2011 up 50 % from 5-7 % from 2004-2009. This percentage goes down to 4 % for those returns between 250,000 and one million and below 1 % for those below 200,000. I was relatively surprised by these increases but do see the logic. The higher the income the greater desire to take financial risks on things that may be a deduction.

The type of entity also has an impact on who gets audited. A taxpayer who files a Sch C has a 4 times higher chance than a wage earner of the dreaded tax audit. This increases as the gross income goes up. Some of our clients have formed partnerships with spouses to avoid filing a Sch C and avoiding the increased chance of audit. Once selected now recordkeeping and presentation becomes the game. This is not a strong trait for many taxpayers.

Believe it or not most taxpayers estimate a great deal when filing their returns.This does not mean the IRS will accept this so here the work starts. Luckily certain items can be reconstructed. Automotive use is a prime example of this. Unless you do your own maintenance mechanics or dealerships will log your miles at each service. Taking a sample at various times of the year gives us a way to determine mileage. Now that this is documented we can turn to gas. We can determine miles per gallon and the average price paid for gas giving us another number. Insurance can normally be requested from an agent. Entertainment is another area ripe for reconstruction. A log is all needed here. Expenses under 75 do not even require a receipt. We do need to record date, time, location and purpose of the entertainment. Most other areas need the documentation and DO NOT as lend well to reconstruction. Other things that lend to being audited are large losses, gambling winnings, employee business expenses, high expense to income ratios and in essence anything else they want to see. The interesting thing is opposite to a court of law where we are innocent until proven guilty IRS is the exact opposite. We are guilty until proven innocent. Everything must be proven. There are no national averages or allowed expenses with IRS.

There are rules designed to avoid repeat tax audits on the same issues within a two year period. Unfortunately these are not always followed. I now have a case where they are insisting on the audit although two years before the same issue was audited and a no change occurred. The taxpayer is frustrated and I do not blame him. We can respectfully disagree with IRS. The normal method to do this is through the appeals process after attempts are made with the original auditor. This allows a new person on the case and their goal is avoiding tax court so they normally are more reasonable and are willing to deal. If a resolution is not achieved here tax court is the next step. Usually a tax attorney is needed at this stage as most CPAs are not able to do this.

To add to the fun the IRS is also now doing correspondence audits through the mail. I have found them very frustrating as it is hard to have several one sided discussions and get anywhere. Long gaps also take place due to handling several cases and IRS is normally one of the slowest organizations you will ever experience anyway. I got so frustrated recently I took a case to appeals and did not even charge the client and got a no change. Ironically this is the same taxpayer they are insisting on the repeat audit; amazing.

While it is allowed for someone to represent themselves at audit I do not encourage this. You do not likely speak their language and cannot really advocate positions as forcefully as someone versed in the law. A bigger reason is you have to answer all their questions. I can truthfully say we will get back to you allowing us to see the direction and hopefully develop a response superior to off the cuff responses. Any of us would normally like to be able to think about our response versus being interrogated.

The IRS is using the matching letter more effectively. This usually involves a list of things they do not see on the return matching their records. Remember many things get sent to IRS ie mortgage interest, stock proceeds, interest and dividend income, and many more. It may just be a location issue but now must be addressed. I have many taxpayers inquire about large differences in years causing an audit? The IRS does not have a way to compare years outside of audit so this is not a factor. All returns filed are graded by the IRS computers and those that grade high are kicked out for a manual review. No one knows the formula. Now individuals decide the returns that will be chosen for audit. The IRS does continue to improve their compliance methods. One simple thing they did years ago is require social security numbers from dependents. 7 million fewer were claimed the following year. Childcare ID numbers are also now required likely greatly reducing this area. The latest area to garner their attention is stock basis a long time area for question. They knew the sell side but not the buy. Now requirements are being made on the purchase side. In summary the IRS appetite is increasing and the taxpayer must be educated to avoid their wrath.

There is normally an energy when new team members join a company. No baggage and a fresh perspective. There is also the excitement of the unknown and unrealized potential. Most of us are quick to hire and slow to fire, when likely the opposite is best. We usually know fairly soon if a new team member will work. Since none of us like change many times marginal performers stay until they choose to leave. I frequently hear business owners say I wish I would have acted quicker or deeper. It takes guts to pull the trigger and make changes.

In today’s world companies that are quick to react to change are usually the ones that recover losses or create profits at a quicker pace. Some companies use personality tests to determine fit and likelihood of success. We have not used these tools but I can see the logic. Background checks are a tool we use and was a recent factor in not making a hire. It was not what turned up on the report but the judgment used to not disclose. This made us focus on other judgment issues on the resume. Morale is impacted every time we add or lose a teammate. We have lost team members that at the time seemed challenging that today with hindsight turned out for the good. I now know we are all replaceable and do not sweat the departure. Personally I will take commitment over talent in most cases. Unrealized talent is quite common while commitment normally produces a consistent result.

These concepts relate to owners also. We recently had an owner leave that did not share the long term vision of the majority of owners. This caused discomfort for his complete stay and ultimately stunted our growth. While we were profitable it was not worth the experience. While it may be harder to remove owners it also can be more damaging to have the wrong mix. Employees that get a mixed message do not know which direction to go and thus are stuck. We have not hired several team members that did not have the right attitude. It is easier to teach skills than attitude. Value systems are equally important. What do you reward and encourage? This will likely dictate what we get.

Do we do it by ourselves or get assistance and bring in a headhunter? We have done both and both can work. Networking is a great way to build a team. We have had several team members come back for a second stint which is rewarding. We have even found people thru direct mail. We have also paid employees to bring us team members if they are hired in challenging markets. We do have a policy regarding not hiring relatives and find this works for us.

Getting the right clients on board can be just as important as the right team members. It feels good to let someone know they do not fit your target client. Knowing what we are makes business easier. No different when we try a pair of shoes that is too large or tight we can immediately tell the fit is not right. The saying an ounce of prevention is worth a pound of cure holds true. Act quickly and keep shuffling until you find the right fit. Lastly your Accounting firm is no different it needs to fit and work too.

Visit us at www.gyldecauwer.com or Call us at: 909/948-9990.