During my time with the IRS, I saw my fair share of mistakes made by businesses that could have easily been avoided. These days, with a large number of taxpayers using a tax return preparer, it is a bit surprising that there are opportunities still being overlooked by both companies and individuals alike.
We can generally agree that taxpayers would rather not have to engage with the IRS. For most owners and operators, a contact from the IRS is one of those annoyances that, while necessary from time to time, can be extremely unpleasant when unexpected issues occur.
So, what causes these issues to arise? There may be multiple reasons for this but one of the largest issues is communication (or a lack thereof) between the business owner and their tax advisor.
Communication is Key
Statistics from the IRS indicate that for 2014 tax returns, about 91% of individuals used some type of e-file or online filing, and 52% of taxpayers used some form of tax return preparer.While many businesses use a trusted tax advisor for their filing needs, a problem can arise when there is a lack of productive communication between a business owner and their tax advisor. Simply put, conversations need to take place early and often – while most tax advisors have long-term clients whom they have worked with for years, a lot can change in a year for a business, such as:
- Did a new product or service line launch?
- Was there an acquisition or disposition during the year?
- Did they expand to new markets?
- Was there a change in the business that now qualifies them for a government incentive?
More often than not, a business owner is too busy running their business and doesn’t have the time to stay abreast of tax law changes or to consider whether they qualify for any government incentives. Things can change quickly, and if you aren’t taking the time to sit down with your tax advisor multiple times a year before the filing deadline, then a strategy needs to be put in place to ensure those conversations are happening.
Timing is also extremely important, as there is a big difference between having an exploratory discussion with your tax advisor five months before the filing deadline, and having those discussions five weeks out when you may be completing a tax organizer or checklist for the return preparation. Allowing ample time for your tax advisor to thoroughly investigate legislative or regulatory changes as well as considering improvements or adjustments made to your business should be standard operating procedure, as each tax year presents its own unique issues, challenges and opportunities as to tax positions that are to be reported.
No one wants to be audited by the IRS. Period!
The anxiety of having to deal with an audit is a real issue for many business owners, but completely manageable when taking the necessary precautions. I like to use the term “audit readiness.” Being subject to an audit is quite rare ( for all taxpayers), but they can take up valuable time for a business owner and cause some serious headaches. The best thing a taxpayer can do to ensure a smooth process if an audit does occur is to have their financial and employment records in order and readily available.
The mission of the IRS is to help the majority of compliant taxpayers with the tax law, while ensuring the minority who are unwilling to comply, pay their fair share. The Internal Revenue Code is a complicated mass of law that most taxpayers are not that familiar with, which creates opportunities for adjustments in an IRS audit. The IRS is tasked with ensuring the correct amount of tax is being paid by a taxpayer. The IRS isn’t actively looking to audit your return, nor does it want to spend the time and resources to do the additional fact-finding that is associated with investigating a return position – but it is their job to do so.
An audit experience with the tax authority can lead to instances of self-censoring by business owners. Just because the claim wasn’t successful one tax year does not mean that you’re not entitled to it – whether it’s that year, the following or even previous years. Proper research and understanding of records needed to help the IRS validate incentive claims is critical to not wasting valuable time and resources by either party.
Information is Only as Good as the Provider
It’s not easy to keep up with changes in tax law and understanding how legislation can affect your company. However, business owners that fail to do so can find themselves behind the curve very quickly. Business owners should do their due diligence and engage with their tax advisor regarding tax law changes on a regular basis to ensure they don’t miss potential opportunities.
Many tax advisor/CPA firms use a tax organizer to gather the details of the business and understand recent modifications. However, that organizer/checklist can only be as good at the details from the taxpayer who is providing them.
When having these conversations with your tax advisor, it’s important you are asking questions about policy or tax law changes you have read or heard about, as well as come prepared with details regarding any adjustments in the business. Good questions to ask include:
- Is there anything new in the tax code that I should know about?
- What impact would this upcoming legislation have on my business?
- Are there any government incentives that our company did not qualify for in the past, but could now because of my recent operation changes within my business?
Taking the time to develop a timely plan to meet with your tax advisor early and often, committing to being “audit ready,” avoiding self-censorship, doing your own research on legislative changes and providing clear and detailed information to your tax advisor are all key to avoiding costly mistakes when engaging with the IRS.
 2017 IRS Data Book, Table 4. Paid preparers filed almost 78.6 million tax returns electronically of over 172.9 million returns filed electronically.
 2017 IRS Date Book, page 2, Number of Returns Filed by Filing Type.
About the Author
Kathy Petronchak is alliantgroup’s Director of IRS Practice & Procedure and the former IRS Commissioner of the Small Business/Self-Employed Division. In her 29 years with the IRS, Petronchak held a number of different roles within the Service, including her time as IRS Commissioner of SB/SE from 2006-2008, a role in which she worked directly with small and mid-sized businesses and practitioners on compliance with IRS standards. During her IRS and post-IRS career, Petronchak has worked with a countless number of businesses in examination from both the government’s perspective and from the position of audit defense.