With the New Year now upon us, it’s high time for business owners to think about their taxes. Be forewarned, some tax breaks previously afforded to installing security dealers and systems integration companies may not be available in 2012. Additionally, some areas will be under stepped-up scrutiny. Tax avoidance is perfectly legal (in fact the tax codes encourage it), but tax evasion can land you in a heap of trouble.

As your company’s filing deadline approaches, below you’ll find copious planning ideas and cautionary advice to ensure your tax filing passes muster while achieving the greatest amount of benefits.    

Heed ‘Red Flags’ to Avoid Audit

In the late 1990s the IRS was criticized for being overly aggressive and Congress encouraged the agency to go easier on taxpayers. Unfortunately, during the past decade the slumping economy and growing deficit have caused the government to look for additional sources of revenue. Thus, the “kinder, gentler” IRS has become a thing of the past. 

One of the biggest changes is in the area of tax compliance. Twice as many tax returns were audited in 2009 as in 2000. Enforcement revenue during the same period increased 50%. Most businesses that are audited probably deserve to be, but many good companies and their owners may be forced to endure an audit for no apparent reason. Honest mistakes are still mistakes, and the IRS isn’t in the mood to cut many breaks these days.

As a business owner, you should take steps to minimize your audit chances by avoiding some of the “red flags” that may trigger an assessment. Following are several of the more prominent hotspots that oftentimes result in the IRS taking action.

Questionable deductions — Small businesses are suspected of being especially creative with their expenses. Be careful if you take a home office deduction, have large travel and entertainment deductions, and/or have lost money (or have had very little income) for several years in a row.

Using a suspectible tax preparer — The IRS has begun to crack down on untrained tax preparers who may play loose with the tax law. As of June 2011, all preparers were required to register with the IRS. If your preparer has not registered and does not have a Preparer Tax Identification Number (PTIN), he or she is no longer allowed to prepare returns for others. The IRS is cross-referencing problem returns to root out marginal preparers. If your preparer’s clients are filing questionable returns, and/or your preparer has been classified by the IRS as “suspectible” you may find that your return is selected for an audit. 

Preparing your own return — If the last paragraph scared you, don’t think that you can escape scrutiny by preparing your own return. Businesses with less than $10 million in revenue that prepare their own returns are also audit targets. The reasoning is that a business of this size typically does not have experienced financial management and may be filing inaccurate returns. There is also the possibility that the business had to file its own return as no respectable preparer would do it.

Owners who take minimal salaries — Many owners of subchapter S corporations take small salaries and allow the income to pass through to them personally as residual business income. This allows the owners to receive the net income from the corporation without paying Social Security tax on the amount. The IRS is selecting businesses for audit if they have high income, but low officer’s salaries and making determinations that the officer’s salaries are inadequate.

This results in an assessment for the unpaid Social Security taxes, plus penalties and interest. This is a very hot enforcement area. Take a look at your compensation for 2011. If you paid yourself a reasonable salary (and withhold appropriate taxes) before Dec. 31, 2011, you may avoid a very unpleasant surprise. If not, you should consider paying yourself a bonus for 2011 now. There will be a penalty for underpayment of your taxes, but it will likely be far less than the cost of an audit.

Lots of 1099s — In February 2010, in hopes of adding billions of dollars to depleted U.S. Treasury coffers, the IRS began a three-year initiative to crack down on what it believes to be a common practice of misclassifying employees as contractors.

About 6,000 businesses have already been targeted for audit, and the government hopes to hire 100 new Department of Labor employees specifically to police these abuses. And, yes, they do share their successes with the IRS and state authorities. The IRS is offering a type of “amnesty” in that you may voluntarily reclassify your “contractors” as employees, pay a nominal fine, and owe no back taxes for 2011 and prior years. The IRS has more than hinted that those companies that do not volunteer may wish that they had. 

Talk to your tax practitioner and take a hard look at the way you are treating the people who work for you. This is especially true in states that require anyone representing your company to the public to carry a pocket card that states alarm company employee.

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