Zapping the Little Guy
The IRS is auditing fewer big companies and more small ones. Have you ever been the victim of an audit?
From Adam Las Vegas Nevada There needs to be a tax revolt in the US. I am being audited along with my business partner at a time when sales are down over 50%, and beg deal making politicians are allocated tax payer monies to failing banks…this economy i shit, and Ill probably just leave the US eventually…seriously…
From Anonymous In reading your letters regarding “Zapping the Little Guy” I felt I must make comment. Small businesses may declare losses and have no income for years and be surviving on the ability to obtain loans to continue. For Kenneth Nevling to imply that many of the small business are cheating because he is privy to second hand information from his wife, a CPA makes me shutter. Having been in business from over 30 years, there are good times and there are bad times. Many business do not take as many deductions and losses that they are entitled to because they don’t want any ‘red flags’ that may trigger an audit. I hope for the majority of us using CPA’s that they and their staff protect our privacy – I certainly would not like hearing that my finances were being discussed over their dinner table. (Small town, small firm not hard to figure who is being discussed)
From J Hout, LA, CA I was audited by a Chinese immigrant who could barely speak English. It took 18 months. The guy said he was tasked with "finding the underground economy." He said I was suspect because I: had a home office (I'm a professional film writer), was in the "creative industries" (oxymoron), and "paid for a car with cash." Shame on me for being old fashioned and buying something with currency that used to be backed by the gold standard and is now monopoly money. It was a total screw job. He first started by saying he'd "discovered" $181,000 in "unreported income." I'd made less than $100,000 that year. So I told him, I hope you're right. They demanded all my bank statements. When I supplied them, they did things like say, here, on this date, you put $700 into your checking account, how do you account for that unreported income? I pointed out that the day before I took out $700 to make a purchase– to buy a K9 protection suit, I volunteered to train K9's for the Los Angeles Police Department– and when we didn't buy the suits at that time, I put the money back into the bank. That's fine, the Chinese immigrant auditor told me in English that was so fractured he had to repeat his statement multiple times, if you can provide NOTARIZED documentation on police letterhead. He wanted a receipt to prove that I HADN'T purchased something. When I exclaimed, here I took it out, here I put it in, according to bank records, he said not to worry, he'd just leave the $700 in the unreported income file. And so it went. I fought for over a year with a CPA/law firm, one of the better in LA. We beat them down to $6,000 (I got the notarized, department letterhead letter from the LAPD) he took 1/3 off my total receipts. When I said to name the things he was deducting (he started with my cell phone bills for the company phone) and we'd start calling the numbers and when they answered, "Universal Studios", he could damned well put the disallowed deduction back on, my accountant pulled me to the side and said, Look, you can't make this a fight over principles. You're dealing with the IRS. Their internal motto, "We got what it takes to take what you got." You're throwing good money after bad, he told me. He's (the auditor) not cutting off specific deductions. He's taking a percentage of your total deductions and it's a pre-determined percentage that's just cheaper than what it will cost you to have me fight him and get it back. It's a parachute. He's in over his head. It's a shit audit and he's got to justify his salary or he'll be fired by the IRS. He's trying to leave here with enough money to keep his job. That's how it works. How about that? Disgusting. The founding fathers would vomit. And they want to overturn the 2nd Amendment in D.C.? Sure. Bullets first. Without that clause, we'd all be bowing to a king already.
From Daniel, Richmond, VA As a long-time CPA and professional auditor, it's obvious to me why the IRS targets smaller companies. The larger firms have to produce audited annual financial statements, so internal controls over fraud and error are generally sufficient. If not, the CPA firms auditing them will not sign off on the audit. There is no such oversight of smaller businesses. If they employ a CPA firm, it's just for tax or bookkeeping services, not full-scale audit work. Certainly many or most small businesses are honest, but too many aren't. And even honest businesses make errors when they don't have full-time accounting staff to keep up with things and sometimes tell the boss "no." Just my .02.
From Gary, West Hills, Ca After putting together specific expenses one page at a time, neatly taping checks and receipts and reconciling them to specific line items, I was able to document every single expense incurred and more. The auditor did not understand the rationale for the exdpenses due to cultural differences or lack of experience.
It appears that the IRS is hiring new agents at a quantum pace. This is to fill a "tax gap" that is composed of some fantasy dreamed up by some paranoid theororist that there is loads of income out there going unreported.
It is a slash and burn policy that is catching many honest code abiding taxpayers and harrassing them uneccessarily. This is even when the evidence shows that there is little or no additional tax to be discovered. These new auditors are covering there behinds on the backs of good law abiding americans that do the best that they can to correctly estimate their correct tax.
Small businesses are not a concern of the legions of auditors out there chasing taxes that don't exist.
From C.Thom Perhaps the biggest surprise for me from reading this article was the
perception it gave that this issue was a conundrum of some sort. The
reality is that the issue of unequal tax treatment is rather obvious for
anyone who cares to take the time to become informed. And therein may be
found the real problem; the general public is either too busy working trying
to make ends meet or they have adopted a defeatist attitude regarding tax
laws. And who could blame them.
Yes the system is rigged. Yes the small business owners, along with lower
wage earners are being systematically and consistently fleeced of their
earnings disproportionately. In order to understand what has happened and
how it has come to be one needs to look back in time. For purposes of this
brief response I shall refer readers to a period of time from 1970 to about
the year 2000, primarily because all of the information for that set period
of time is readily available. What do we find?
Let us briefly state a few verifiable facts:
1. From 1970 to 2000 the share of income for the bottom 90% of
Americans has been reduced from 67.1% to 52.0% (a 22.5% drop). During the
same time period the top 1/100 of 1% have had earnings increase from 1.0% to
5.1% (a 412.0% increase). Much of this variation has had to do directly
with our tax structure and how it is administrated.
2. The same two groups (1970 to 2000) when viewed using adjusted pretax
incomes in year 2000 dollars showed the following discrepancies. The bottom
90% of all income earners actually lost net purchasing power; 1970=$27,060
and year 2000=$27,035 or a 0.1% loss. The top group as described above went
from $3,641,285 to $23,969,767 or a 558.3% increase.
Much of the differences in rates of increase can be directly attributed to
the changes in tax administration which by the way includes the small
business target groups for audits, tax rates and of course the ever popular
tax deductions for the larger businesses.
It takes a true Pulitzer Prize-Winning investigative reporter to really put
down in print in an understandable and readable format what has really
happened to our country. The sad part is that it has all been perfectly
legal due to the tax laws that have been passed in Washington.
I believe that Fortune Small Business magazine should have one of its own
writers read and report on a New York Times Best Seller and winner of the
IRE Medal, Best Investigative Book fo the Year, called "Perfectly Legal" by
David Cay Johnston (a Pulitzer Prize-Winner by the way). His book gives the
exact answers for small business and for individuals. It details how the
tax structure and administration of the tax laws have slowly but
dramatically changed our country.
As I mentioned at the beginning of these brief note; everyone needs to take
the time to learn about and understand what has been happening in the
country. Unfortunately, it takes an entire book to fully explain
everything. I would suggest that all of the readers of FSB go to their
local library (paid for by taxes by the way) and check out a copy of the
book. Or heck….just go out and buy a copy with all of your discretionary
income…..HA!
Thanks,
C.Thom
From Betsey Upchurch, Evergreen, CO As a micro business, I have been audited and after 18 months, the IRS got absolutely nothing – but it cost me a bundle. If the IRS had to pay the expenses of those found "innocent" they would be a lot more accountable about who and why they audited.
From Bill Lockert Thanks for your article in June 2008 issue on IRS auditing small business
owners. I am in that catagory of "buing audited". I am retired and operatte
a small consulting business with under $200,000 gross income. My wife, who
is also retired, paid what we determined to be reasonable taxe, but IRS
determined we should be audited.
I have met several times, but no closure on Expenses being questioned. I
have asked for a meeting with the manager or Appeals Agent.
Hopefully, this will bring closure to the examination. Not Hopeful.
Bill Lockert
From Kenneth W. Nevling You know my wife is a CPA for a very small CPA firm that tends to specialize in small business'. From what she relates I can certainly understand why the IRS is going after these "Schedule "C" companies and "S" corporations. You'd be amazed at how many of these people declare no income, and losses for years – she'll ask how they manage to pay their mortgage when they report "no income" at all. Then there are those that "pass through" everything in the world they buy through their business, thinking that the can purchase anything and charge it as a business expense.
The tone of your article is such that you wonder why the great big IRS is picking on these poor little people – I can tell you why: a great number of these poor little people are cheating their fellow taxpayers (not some abstract entity known as our government) out of hundreds of millions of dollars. In the end some one will pay….if not them, then……..us?
From Donny Fargo Our small construction company in Arizona generally grosses around
$200k annually. Yet, we were able to draw back to back (2005 & 2006)
audits, just recently. Because of our trying to business properly, the IRS
can’t seem to find hardly anything. So, they continue to dig deeper and
create more cost to us by forcing us and our accountant to jump through more
hoops.
Your article was very well enjoyed for several reasons. One, being
that it makes the audits less personal. Things hurt less when you know a
lot of others are getting the “treatment” too. Secondly, it reminds us that
eventually, the audits with end!
Donny Fargo
President, Owner
Fargo Painting, LLC
From Jessica McKean My husband and I have a small business also, and for the last 7 years we have been questioned by the IRS with at least 2 or 3 letters a year.
We always pay the right amout to the IRS and they always send us a penality and interest letter. IT's amazing how when you catch them in a error you can't get penalities and interest back from them.
This tax year 2007 just because they got their 14,000 from our company, but not a one time; they charged us a 258.00 penality.
Our stimulate check was to be for 1,200.00, but they took out the 258.00 and said we owned it for our 2007 tax payment.
I think it's harassment and I think we should along with our accounts be able to collect penalities and interest from them when they are found to be wrong.
A put out small business owner
Jessica
From Bill Ford 1. Unable to afford expense to contest – easier to extort funds
2. Global companies own Congress and many of the judges – they make contributions in election years.
3. Who cares? Small companies have no public foot print.
Any questions?
Bill Ford
I have to agree with the comment below. Why is it that I'm being audited? I work 14 hours a day, take no vacations, barely afford my mortgage, and don't have time to myself, and have paid taxes and interest and penalties and whatnot through the nose, while friends of our former executive administration bilk us out of billions of dollars, with absolutely no oversight? America sucks. We didn't used to suck so bad, but now we most definitely do. It's time to get rid of the IRS, and the leeches who truly do profit from it, like Haliburton and weapons/munitions manufacturers.
Yes, there is a huge gap between taxes owed and taxes paid. But it's not coming from people like you and me. It's coming from those that the IRS isn't targeting. I don't know why anyone would want to work for the IRS, nor any state Dept. of Taxation; one would assume that those who are enjoy hurting honest people while letting criminals fly to Washington on their private jets, drinking champagne and asking for bailouts.
Our country has completely lost its way, is now the home of the afraid, and the voiceless. We don't know how to change our screwed-up government, we have no say. Once every two to four years we get to vote for a new figurehead for our local and national government, and on a few cryptic laws that are written in a language that doesn't resemble English, with tricky answers that seem wrong, even for those who do actually take the time to inform themselves. And if you're educated, watch out; just try expressing your opinions in a public place or in the media, you'll get a torrent of flames thrown at your back. Just try standing up for true freedom, and not the flag-waving, empty rhetoric our politicians have been spewing at us, especially in the last eight years.
Yes, it is time for a change, but I doubt that U.S. citizens know how much and what type of change exactly is entailed in fixing our completely broken faith, pocketbooks, society, system of taxation.
Why is it that Holland, with its incredibly high taxes, is also an incredibly happy place? What do we have to show for all this money, all this income, and all this effort on the part of the IRS? Do we have fewer poor families starving, going without electricity, walking miles to work, or forcing their children to drop out of school to work before they're adults? What kind of a nation are we building with our increased audits and our improved security, our crackdown on the "middle" class?
What do we get?
More money to spread around for good public projects? I think not. Less crime, white-collar or otherwise? I think not. Better schools? I think not. Happier children? I think not.
IRS: get a grip. You're part of the problem with America. You're not helping.