In order to help close the ever growing tax gap, the IRS has plans to focus their audits on more areas that could be found on any Small Business Tax Return. It has been estimated that of the roughly $450 billion tax gap, more than $375 billion is caused by small businesses underreporting income and over reporting expenses.
Here are some of the areas you should be sure are being handled properly:
- Personal use of company cars: the IRS is finding that many employers are not properly reporting employees’ personal use of a business vehicle on the W-2 or 1099. The percentage of use as a personal vehicle versus business vehicle is considered income to the employee and should be taxed as such.
- High income tax payers: in the coming future the IRS will be auditing a large number of high wealth tax payers (focused on taxpayers with total income of over $1 million) that have Schedule C income business returns.
- Form 1099-K matching: in 2011 we saw for the first time the 1099-K Form to report merchant cards on business returns. The matching of this will be in force beginning in 2013, and is aimed at the large amount of small businesses that are not in compliance with income reporting to the IRS.
- Credit for Small Business Employee Health Insurance: Small business employers and tax exempt organizations will be under scrutiny for the proper use of the small business health insurance credit that became available in 2010. This tax credit is available for certain small employers that provide health insurance coverage to their employees.
- Abusive International Transactions: The IRS offers a voluntary initiative for foreign bank account reporting. They are aggressively pursuing taxpayers that may be hiding assets in oversea accounts. There will also be a focus on offshore transactions for businesses.
- Abusive Transactions and Unreported Income on Partnership Returns: The IRS is starting an initiative to investigate this area. You can expect the IRS to look into large loss partnerships and specific abuses that emerge from their findings.
- Abusive Transactions on S Corporation Returns: The IRS will be checking on specific areas of S Corporation returns, mainly compensation paid to officers and losses in excess of basis. The IRS will also look to see if the shareholders are taking excessive distributions to avoid paying Social Security taxes, especially if there is no salary being paid to officers.
- Proper Worker Classifications: The IRS is usually looking into this area and will continue to do so in the future. The IRS understands that it can be financially beneficial to class workers as subcontractors versus employees and therefore will check to be sure the proper class is being used.
These are very common areas that will likely show up on most business returns, and as a business owner, you need to be sure that you are properly handling them. It is important to have frequent meetings with your accountant to be sure you do not get any audit surprises.