Are you worried about taxes? Have you claimed your dog as a dependent? Bought yourself a luxury truck to pull your boat and claimed it as a full business expense? Simply inflated your business mileage?
Or do you wonder just where you’ll find the money that you owe Uncle Sam?
Perhaps you imagine a big mean guy in a black suit one day knocking at your door.
“Surprise – I’m from the IRS and I’m taking you to jail,” he says as handcuffs jingle from his belt.
According to my IRS revenue agent friend Brian, it’s not as bad as you think, so we can all stop worrying. Brian’s IRS job is also known as “auditor.” He is the one who might come to visit you. But the thing is, Brian is truly a nice guy. He knows that if you’re self-employed or running a small business, taxes can be difficult.
Brian specializes in small businesses. In fact he has helped many plumbing companies. “These are good people,” said Brian. “Most just got off track and don’t know what to do about it. I help get the tax problem resolved, so the taxpayer can get back to living a normal life.
“Most got in trouble tax-wise because they had awful accountants, added Brian. “For example, the accountant might have been going through a personal crisis and stopped doing their job. The small business owner either wasn’t aware of this, or didn’t know what to do about it. They were grateful for the auditor helping to set up the books.”
Brian is adamant that a big challenge for a small business owner or self-employed person is to find a reliable bookkeeper and tax preparer.
Simple as that sounds, he believes that it’s not that easy a thing to do. For example, the small business may be paying a supposedly-reputable firm for monthly services, yet receives no updates. Or an accountant may simply disappear, and it takes the taxpayer awhile to figure that out.
To keep things going right, here is some advice from Brian:
What to look for in an accountant or preparer: Getting the right accountant or tax preparer isn’t a matter of grabbing just anyone who claims they can do it. Brian advises, “Don’t just assume you’re getting what you’re paying for.” Get an engagement letter of what services are to be performed. Then monitor to make sure the performance is happening. Are the books set up? Is the bookkeeping done? Is someone keeping an eye out for employee theft? In other words, is there an active interest in your success?
The wife or girlfriend: Brian’s experience is that the wife or girlfriend generally does a good job — if they get good information and instructions. You have to stay involved. Just having the computer program Quick Books doesn’t guarantee that it’s done right.
Signs of a bad accountant or tax preparer: Anyone is at risk of having a bad accountant or tax preparer and not know it. Here is evidence that might make you suspicious:
- Numbers don’t change from month to month
- Rounded numbers — e.g. $15,000 truck mileage expense
- Information on the return doesn’t match what you supplied
- Numbers are “improved” to your advantage (so you refer others to the preparer)
- Preparer is recommended to you because he/she claims big refunds
If you can’t pay anything: Brian says to quit worrying — you’re not going to jail, even if you can’t pay anything. There’s never jail if there is no criminal intent — that is fraud. If you can’t pay, the auditor generates a letter, and the case goes to a revenue officer to work out a collection plan. Then the worst that happens is that you pay the tax, interest and a penalty. If you went to jail, you couldn’t pay anything, so it’s in everyone’s interest to keep you working. And you won’t be left destitute. The IRS has to leave you a minimum to live on.
Fraud puts people in jail: Criminal intent, that is, fraud, is what puts people in jail. Brian’s experience is that only about 2 percent of the people he dealt with were bad. The rest were “just folks.” An example of fraud is when an employer, required to pay half of Social Security, doesn’t. This is viewed as stealing from employees and the federal government. In that case, the IRS officer would shut down the business and take vehicles. Jail time would be on the horizon but not soon. It’s a two-year process to deal with criminal intent. First there would be a criminal investigation, referral to a U.S. attorney, prosecution, and a trial.
Bribes and threats
Perhaps of more concern to the IRS than unpaid taxes is a taxpayer trying to bribe the agent. So part of Brian’s job is watching out for attempted bribes. If he thinks he is receiving an offer, he is to develop it.
Brian said that it is almost comical watching people try to figure what they can offer. Is it NBA tickets, or coffee, or just a more comfortable chair? The rules are that the auditor can accept coffee or soda, or even a meal if all the company’s employees get it as well. But Brian usually just made it easy on everyone and carried his own lunch.
Around the holidays there was the problem of being offered turkeys. Brian said he solved that problem by saying, “I’m newly divorced, and I don’t know how to cook.”
As for threats, Brian said that fortunately no one has pulled a gun on him. The only mishap has been that a tire distributor threatened to kill him (twice!) with a letter opener.
Maybe you can relax a bit this year. Unless you are actively involved in fraud, you aren’t going to jail. And even if you are convicted of tax fraud, it’ll take ‘em a couple years to haul you in.
Carol Fey is a veteran HVAC industry trainer and writer. She is Mountain West Regional Manager for the Viessmann Manufacturing Company, uncompromise.viessmann-us.com. You can find her at www.carolfey.com, email [email protected].