Lexington, KY – Tax attorney Bob Webb said just following the rules might not be enough to ward off extra scrutiny from auditors at the Internal Revenue Service.
“Avoiding an audit is really a question of the size of your company,” said Webb of Frost Brown Todd’s Louisville office. “In other words, there’s different audit rates for different sizes of companies. The more assets that you have in your business – the more assets that you report in your corporate balance sheet – the more likely you are to be audited by the IRS.”
While that could fall under the category of good problems, dealing in-depth with the IRS is costly on time and money even if an audit produces no malicious or negligent findings.
Webb said such an audit can be triggered by disproportional deductions.
“Generally the IRS is looking for outliers, they’re looking for something that seems unusual or unusually large,” he said. “An unusually large deduction, something of that sort of sets off an alarm bell.”
While unusually large deductions can be legitimate, Webb suggest companies have their ducks in a row before tax forms are ever filed.
“If you’re implementing a tax strategy… that is saving you a lot of money, what you might want to do is get a second opinion on it before you implement the strategy because once you file a return you’re subjecting yourself to potential penalties that can range anyway from 20 percent all the way up to 75 percent if its fraud,” he said.
If a second opinion isn’t financially viable, Webb said a signed letter from the tax professional, be it a CPA or attorney, who advised the strategy could save a corporation from civil penalties.
“You want to make sure you get your advice in writing from a licensed tax professional so that they’re putting their license on the line,” he said. “If it is in writing, that can get you out of the IRS civil penalties if they attack the transaction.”
A common area that brings trouble for businesses, especially family businesses, is company cars.
“You could look at that as a corporate business expense if all the individuals work for the business and use the automobiles in the business. But the IRS could turn around and argue that all the money you paid for the automobile is unreported gross income,” he said if family members have cars registered to the business that are not often used for work purposes.
A seemingly innocent use of a company car for non-business purposes could result in a criminal tax evasion investigation.
Basic levels of tax penalties:
1: 20-40 percent civil tax penalty “if you’ve been negligent and sort of aggressive,” according to Webb.
2: 75 percent civil fraud penalty, “you’ve intended to violate a tax statute.”
3: 75 percent and criminal tax charges.