Business Advisory Blog

It Just Makes Sense

When that nasty letter arrives from the IRS or your state’s auditing division informing you that an audit is on the way, how do you respond? I’ll take care of it myself with my internal staff? I call my accountant and fax over the notice? Ignore it, and hope it’s forgotten?

Regardless of whether or not you are concerned with IRS deductions/income, sales/use tax, or employment issues, it’ll be the best use of your time and money to request your qualified accountant to conduct a thorough “pre-audit” of the years to be reviewed…and potentially the subsequent and previous years should you have a consistent potential exposure.

A thorough “pre-audit” will identify potential tax causing exposures, allow you and your accountant the time to prepare documentation to support your issue (if found), create a strategy for the audit to mitigate the potential issues during the governmental review. When the auditor sees that your information is out of control, disorganized, can’t answer questions, they just seem to laser in on their work. If they see documentation prepared, it’s organized, they have a place to work with your accountant present (at all times) – not the owner- either at the accountant’s office or your place of business (preferably the accountant’s office), there is a greater chance of success.

20 years ago, I represented a large residential construction company. In pre-audit we found a number of personal items such as his wife’s clothing and trips to Europe among many other potential issues. We had a potential problem. We made sure that the sample homes had closets filled with clothing, that the trips had some documented relationship to their home design and to the furnishings of the sample. We had a strategy of giving the auditor a tour of the models, then worked off site at the accountant’s office. In the end, the issues were still the issues, but the client received a “no change”, not because of lies or destroying documents, but by preparation, designed work flow, and by providing pre-prepared documentation.

When you “skim” cash in substantial amounts, run your new home through the cost of goods sold (or in one case a yacht), buy expensive jewelry for your spouse, take little salary or distributions and run all of your personal expenses through the company, you run the risk of fraud, enormous penalties, back and forward interest, or potentially litigation and/or jail time, and personal and business embarrassment or ruin. There are so very many ways to avoid taxes, defer income/taxes and to maximize deductions. In the end, the combined tax rates (state, local, federal) of the worst taxing parts of the country are still under 50%. Best advice – learn how to make more money so that the taxes almost become irrelevant.