Kenneth Dewitt is a CPA and certified financial planner who serves as a part-time chief financial officer for a variety of businesses, including trucking companies. E-mail kdewitt@eTrucker.com.
Haven’t had enough difficulty lately with routine troubles? Why not throw in a visit from your friendly Internal Revenue Service agent? A tax audit may not be fun, but at least you can avoid some nasty surprises if you know what the auditor will be looking for. Preparation for an audit begins with an understanding of what an IRS agent will read before he audits your company.
And what your agent will read is the “Market Industry Specialization Program – Trucking Industry,” a 114-page audit guide. According to the IRS, the purpose of the audit guide is to:
- Provide the IRS agent an overview of the trucking industry;
- Familiarize agents with business, tax, and operational issues and terminology found in the trucking industry; and
- Assist IRS agents with their examinations by providing audit techniques specific to the trucking industry.
You can download the trucking industry audit guide – one of more than 50 such industry-specific documents – from the IRS website. Should you “win” the tax audit lottery, get a copy immediately. But don’t wait until the auditor calls. Give a copy to your accountant and let him do a little preventive maintenance on your books and records.
One of the most interesting and useful sections in the audit guide is the laundry list of “corporate issues” typically raised during audits of general freight carriers. When the auditor goes snooping through your closets looking for skeletons, this list will be his floor plan. A sampling:
- Employment tax issues – How can the IRS claim more social security and Medicare tax? By converting independent contractors to employee status, finding supplemental wages for bonuses, pensions or vacation pay that were not included as wages, or searching for cash payments to lumpers that were classified as outside services but should be wages.
- Related-party transactions – What will the auditor look for when officers or shareholders are involved in transactions? Leasing of equipment from shareholders not at fair market value may lead to assertions of disguised dividends, improper generation of passive losses or improper passive gains. This is fertile ground for the IRS because success in this area lets the agency tax transactions twice in the case of C corporations, or it lets the IRS eliminate certain deductions on your personal tax returns.
- Equipment capitalization policies – The IRS wants you to not charge some things off immediately as expenses, but rather write them off over several years. Auditors will search for failure to capitalize certain major repairs or additional equipment, such as radios and computers. They will review for improper calculation of tax basis of equipment due to transfers between related parties not recorded at adjusted tax basis; financing charges improperly included in adjusted basis; and possible trade-in allowances not properly taken into account.
Auditors will look for other skeletons in personal expense deductions, deductions of personal expenses, deduction of penalties or fines, misclassifying meals improperly to avoid the limitations, and excise tax issues.
There’s other useful stuff in the audit guide. It includes, for example, guidelines on how the agent should conduct the initial interview, tour the business premises and be on the lookout for audit issues during the walk-through. Other juicy areas include the agent’s guide to how your accounting records should be set up and common sources of unreported income.
No matter how prepared you are, a tax audit is an unsettling event in a business owner’s career. Still, you can rest a little easier knowing which closets will open and making sure you aren’t stashing any financial skeletons in them.
Download the 114-page IRS “Market Industry Specialization Program – Trucking Industry” audit guide in PDF format at www.irs.gov/pub/irs-mssp/truck.pdf.
See also, “IRS Business Tax Audit Secrets” by Judith Kautz, part of the “What You Need to Know About” series for Entrepreneurs, at http://entrepreneurs.about.com/library/weekly/aa062900.htm.