Solid Strategies to Avoid Audits;
Know Your Taxpayer Rights
The Taxpayers Bill of Rights, part of the IRS Restructuring and Reform Act of 1998, requires the IRS to explain a taxpayer’s rights and the IRS’ obligations during the audit, appeals, refund and collection processes. A taxpayer is also guaranteed the right to be represented by any individual currently permitted to practice before the IRS. What’s more, any interview must be suspended when the taxpayer clearly requests the right to consult with a representative.
Among the more important rights given any alarm installer, dealer or integrator whose returns are targeted for further examination, is whether to be represented by a tax professional or whether to attempt to answer the IRS’ questions alone. However, unless it issues an administrative summons, the IRS cannot actually require the taxpayer to accompany the representative to the interview.
Another important consideration for every electronic security professional being audited is where to hold that meeting.
Should the meeting be in the accountant’s office where all of the working documents are easily accessible? Should it be at the dealer’s place of business, the place where all the records are kept, in order to demonstrate to the IRS auditor that there is nothing to hide and that the electronic security operation is a legitimate one? Or, should the dealer and/or his or her representative trudge down to the IRS office armed only with the specific documents and information requested by the IRS auditor? There is no one right answer.
Ignoring the IRS does not work. The IRS may issue summons to thirdparty record-keepers (attorneys, enrolled agents, banks, brokers, accountants, etc.) for the production of records concerning the business tran
sactions or affairs of an electronic security business – and its owner. Of course, the taxpayer must be notified of the summons and has the right to intervene. The taxpayer can, in fact, begin a proceeding to quash the third-party summons.
IRS Is Considerate to Mistakes
As mentioned, the majority of electronic security professionals file relatively honest returns. The occasional error, misinterpretations or honest disagreements of “gray areas” may result in additional tax assessments. However, from the initial screening for accuracy that each return receives until the final appeal is exhausted, mistakes in the favor of the taxpayer have been discovered in about 25 percent of all cases.
The IRS is usually quite sympathetic to honest mistakes and more than willing to discuss underpayments of taxes that may result from the many so-called “gray” areas of our tax rules. On occasion, it will negotiate the amount of tax due. But the IRS does not like fraud.
Honesty Is the Best Policy
Changes to our tax laws in recent years have resulted in tax professionals generally taking a more conservative approach to the tax advice they render and the tax returns they prepare. After all, if the IRS discovers a transaction has been mislabeled or incorrectly structured, and if the tax laws were ignored, the professional as well as the taxpayer face penalties.
Despite the ultra-conservative position now taken by many tax professionals, no electronic security business – or electronic security business owner – should forego or ignore valid tax deductions. Often, disclosing those transactions or deductions on the tax return will be enough to pass the scrutiny of the IRS, eliminating a full-blown audit. At worst, disclosure may help avoid the levy of numerous penalties for taking a “frivolous position,” or claiming deductions that result in “accuracy-related” penalties.
Honesty and clarity can go a long way toward preventing and dealing with an IRS audit. Obviously, every alarm installer, dealer and integrator needs an audit strategy as well as a fallback position should those strategies fail.
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