Everything you need to know about surviving a tax audit

By Zach Pierson

If you are a small business, audits are going to be part and parcel of the way that you move forward. An audit does not mean that anything is wrong, or that you have to pay more money. Typically, it just means that the IRS wants to touch base with you and to learn more about what is going on. If you are going into your first audit, there are a few things that you can do to make things easier on yourself.

 

Be neat

If you are called in for an audit, you may be feeling a little pressured or tense. You may even be angry because you think they are questioning your honesty. No matter how you feel, you should not bring all of your records to the event and drop them in a big pile in front of the auditor. This will not make the process go more quickly, and it might make the auditor think that you are trying to hide something in the mess. If you keep things neat, you’ll find that in many cases, the auditor is willing to give you the benefit of the doubt on questionable items.

 

Knowing about books 

The auditor may ask to see your books. Remember that as a small business owner, you do not necessarily need to have them. If you are a small business, there is a good chance that you only keep your checkbook records and your cash register tapes. There is nothing illegal about this, but if you do have books, the auditor has a right to see them. If you do not have them, be up front about saying so. Have a print-out prepared if you keep records on your computer.

 

Entertainment receipts

No matter how large or small the business, a certain amount of entertaining is likely. Perhaps you end up taking people out, or perhaps the business held a holiday party. Entertainment is one area where auditors can spot mistakes, so it is worth your while to keep track of these receipts as a priority. Keep the receipts, and include any notes on them that might be useful. Remember that the key is to prove that you were not abusing the system.

 

Providing a work space

The auditor will be coming to your office to do his or her work. This means that they need a space to work, and they will be there for at least a few hours. Setting aside a workspace for them and providing some good light can make their job much easier. Some people offer the auditors their own work areas if there is no other space.

 

Cooperate

Auditors face a great deal of distrust and anger, but you can make a good impression if you treat them as professionals who are just there to do their job. They are not out to get you, and they want to come to a satisfactory solution as much as you do. Treat them with respect, ask what questions you want, and do not be accusatory.

 

Understanding the results

After the findings, the auditor will discuss the consequences with you. In some cases, this means that he or she will tell you do need to pay more in taxes; in other cases, they will say that there will be no further payments necessary. This will happen before they leave, so be ready to talk this over.

About the author: Zach Pierson is a tax blogger with the State Tax Help advisors.

* All images US-PDGov

Tax Deductibility of IRA Contributions

Tax deductibility of Individual Retirement Accounts (IRA's) is one of the primary features of these types of investments. These benefits can not only save a person and/or organization money, but also lead to greater income potential.

There are several types of IRA's and the tax benefits of each is unique. For individuals the benefits can mean added financial security in older age and for organizations/employers contributing to IRA's , the tax relief can lower payroll tax i.e. money paid to the Government. A brief description of various types of IRA's and the associated tax benefits are as follows:

• Traditional IRA: Contributions to traditional IRA's are tax deductible so long as the amount put into the account complies with federal tax regulations. This tax deduction lowers overall adjusted gross income allowing one to pay less taxes in a tax year or receive a larger tax return. Tax is applied to the contributions and earnings in this type of account at the time of withdrawal. Example: If monthly paychecks are $4,000/month, Monthly contribution from paycheck is $166.676therefore annual taxable income is reduced by $2000 saving $200 at the 10% income tax level.

• Roth IRA: Contributions are made from taxable income, however the withdrawals made after age 59.5 years of age are not taxed and neither are the earnings generated through the Roth IRA. Example: An individual contributes $4000/year to a Roth IRA, that contribution is not deductible, but over 10 years the 4K per year earns 10% each year. Compounded, the 10% tax free earnings yield ($74,124.67-$44,000)=$30,124.67. The $30K in tax free earnings saves one $4500.00 in taxes.

• Employer IRA: Corporations that don't utilize a pension fund may elect to use an employer IRA. These IRA's are established by an employer therefore are tax deductible for them and reduce taxable income for the employee. The affect is generally the same for the employee as taxable income declines in both instances. The contributions and earnings acquired through this type of IRA are tax deferred i.e. taxable upon withdrawal.

• Spousal IRA: Similar to traditional IRA's if contributions are made before the annual IRS mandated deadlines, the contribution is tax deductible. To benefit from a spousal IRA, the filer's tax status should be married filing jointly.

• Keogh: Keogh plans are similar to IRA's but slightly different in the sense they are for the self employed, certain types of small businesses and employees of those businesses. This money can be rolled over into an IRA and contributions are tax deferred until time of withdrawal. Unlike IRA's, Keogh's are not tax deductible because the funds are taken from gross earnings rather than net earnings i.e. pre-taxable income.

IRA contributions vary in terms of maximum amount allowed. Generally the contributions range between $4-6000 per year with contributions in the upper end being reserved for older retirement planners. This contribution amount can have a marginal influence on final tax calculations, but can be all that is needed to lower one's tax bracket from 20% to 15%.

What's more, not all contributions are deductible depending on one's income range. For Roth IRA's and Spousal IRA's incomes over 160K are either non-existent in the former, and not allowed in the latter. While an individual may own more than one IRA there are tax limits on the amount that is deductible i.e. $2000.00/year if filing singly and $4000.00 if married filing jointly.