Everyone knows you have to obey the law. Don't speed. Don't cheat on your taxes. Speeding is simple: you know when you're doing it, and as your attorney I would advise you to obey the law. Same goes for taxes, of course. But taxes are tricky. It is easy to make mistakes, and many small business owners just don't take record-keeping seriously. What's worse, many small business owners operate under the assumption that "the IRS doesn't care about small fish like me," so careful records are "no big deal." Think again. The IRS takes small businesses very seriously, now more than ever before. Pass-through entities like LLCs and S-Corps are the current flavor of the month for audits.

The TIGTA (Treasury Inspector General for Tax Administration) recently conducted a study of audits performed by the IRS. Interestingly, it found that overall corporate audits were on the decline over the past ten years (aside from a slight increase in 2007). However, the number of audits of S-corporations during that time increased dramatically. In 2007 alone, the number of audits for companies with less than $10 million in assets increased by 12%. Most of the business owners reading this article fall into that category. Since 2004, the number of S-corporation audits overall has increased by a whopping 176%.

What should you do? Most small businesses have no intent to cheat on their taxes. But mistakes happen, and books are often incomplete or sloppy. Here are some guidelines to follow to be sure your company is compliant, and to also be ready for an audit if they IRS ever comes knocking:

• Keep a detailed date book or planner, including travel, meetings, entertainment and meals so the IRS can match up claimed expenses to a detailed record of events. If you keep your calendar electronically, print it annually and note in writing the date it was printed.
• Never take cash out of the business. Whether a reimbursement, dividend, or any other distribution, always take money out of the business using a company check. The IRS may automatically suspect skimming if they see you taking cash out of the business. Checks create a detailed paper trail, and allow for notes to be kept by way of filling in the memo section.
• Keep physical receipts for all purchases over $500.00, depending on your business. If your company is large enough that every office supply order is greater than $500.00, then you may want to increase that threshold to $1,000.00, etc. The idea is to establish a certain dollar amount that constitutes a "major purchase" and to maintain receipts for all such purchases. Also, keep receipts for any purchase (such as equipment) that will be depreciated, regardless of the cost.
• Always use an accountant to prepare your taxes. The fact of the matter is that the IRS doesn't really care if mistakes you made were honest mistakes. They were mistakes none-the-less and carry with them the baggage of interest and penalties. Especially for new businesses, there is a misconception that using an accountant may be too costly. However, I have had many clients utter the sentence, "It would have been cheaper to pay an accountant" when facing the stiff fines associated with years of botched or missing returns.
• Use a payroll service. Not only is payroll a huge time commitment (if done correctly), but it is another area where it is easy to make a mistake. Using a payroll service allows you to free up your time to grow your business, assures that regular tax deposits will be handled correctly, and that payroll tax forms will be correctly prepared. And even if the payroll service does make a mistake, the fact that you depended on the service can be used to argue against the imposition of fines and penalties.

As always, we're here to help in any way we can. Whether it's a review of your current tax liability, or just a referral to a qualified accountant, please feel free to call our office to get on the right track.