Who's afraid of the IRS?
Let's face it: We All Are!
And with good reason . . . IRS horror stories
abound, and we all know someone who's been
through an IRS audit and lived to tell about it.
So the purpose of this article is to help
calm those fears. Maybe I can't remove them
completely, but I do hope you find some
comfort in what I'm about to tell you.
Do you have any idea how many
tax returns are audited every year? Here
are the numbers, as provided by the IRS:
INDIVIDUALS -- without Schedule C
Gross Income:
< 25,000 ................ 0.63%
25,000-49,999 ........... 0.23
50,000-99,999 ........... 0.27
> 100,000 ............... 0.74
INDIVIDUALS -- with Schedule C
Sales:
< 25,000 ................ 2.63%
25,000-99,999 ........... 1.13
> 100,000 ............... 1.36
C CORPORATIONS
Assets:
< 250,000 ............... 0.22%
250,000 - 1M ............ 0.73
1M - 5M ................. 2.06
S CORPORATIONS .......... 0.42%
PARTNERSHIPS/LLCs ....... 0.27%
Let's take a close look at these numbers,
shall we?
Notice that in virtually every category,
the audit rate is less than 1.0%. The only
exceptions are large C Corporations with
assets over $1 million, and Sole Proprietors
(Schedule C filers) with sales greater than
$100,000 or less than $25,000.
Think about this for a moment -- your chances
of getting audited are probably less than 1 in a 100.
Do you like those odds? I sure hope so.
The IRS doesn't have the resources to
conduct widescale audits. That's just the
way it is.
Now, how should this good news about IRS audit
rates effect you? I can think of at least
three ways:
1. When it comes to your attitude toward the IRS,
cheer up and take heart. The likelihood
of an audit is slim. I meet people everyday who
appear to be well-adjusted and successful, but
just bring up those dreaded letters, "IRS", and
they turn into a paranoid basket-case.
There's no need for such irrational fear. You've
seen the numbers. Let the facts control your
emotions, not myths and misconceptions.
2. Keep these audit rates in mind when deciding what
deductions to take. I am not recommending that you
cheat on your tax returns, but I am suggesting that you
consider being more aggressive. If the item in question
is not fraud, and if you have at least an arguable
position, these low audit rates lend merit to the old
saying "when in (reasonable) doubt, deduct it".
3. The low audit rates should NOT give you reason
to become sloppy in your recordkeeping. Please do not
take the attitude, "Well, since there is such a small
chance of being audited, why keep records at all?
Who needs all this paperwork?"
Who needs to keep accurate records of income and
expense, even if the odds of an audit are low?
YOU DO!
If you are serious about being successful in business,
you will want to know how the business is doing, right?
And if you think that your checking account
balance is an accurate indication of the success
or failure of your business, you are mistaken.
Successful business owners keep their finger on the pulse
of their business every week. They know how much is
coming in (and why), and they know how much is going out
(and where).
Successful business owners maintain accurate financial
records so they can make sound business decisions to
increase sales, minimize expenses, and multiply profits.
If your attitude is anything less than that, your
business is doomed to fail.
While the chances of being audited are low, so are
the chances of being successful without good records.
NOTE: The above statistics are taken
from an Excel spreadsheet freely available
at the IRS website. This spreadsheet shows
audit rates for all types of returns for
years 1996 through 2002.
http://www.irs.gov/pub/irs-soi/rtctab6a.xls
