Newland's Business Notes

Monkeys DO Fall From Trees -- Tax Audits

Volume 2 Issue 3; March/April 1998

Okay, I admit, monkeys don't fall often, but, occasionally, one does. If you're one to believe that you wouldn't fall if you were a monkey, you probably also believe you won't be audited by the Internal Revenue Service (IRS). Actually, the chances for both events not happening are quite good, assuming no tax-related risk factors of the type discussed below are involved.

According to a feature article in The Washington Post of April 8, 1998, "just over 1%" of the populace gets audited by the IRS. While few think about IRS audits (or sometimes, think at all), there are factors that can cause your chances of being audited to increase substantially.

Quite a few cases I litigated as a former IRS trial attorney stemmed from disgruntled employees, associates, or people with "big ears" at bars. For example, one of the cases involved a cocky man named L. O. D. Mouth. While having a drink at a bar, a Pittsburgh policeman overheard him bragging about selling diamonds and not reporting the sales. (Incidentally, three initials instead of a first name is a convention among southern cavalry officers and people who talk too much in Pittsburgh bars.)

L. O. D. Mouth was later audited and cited for a substantial income tax deficiency. Surprisingly, much of the tax deficiency came not from the unreported diamond sales, but from an entirely different source of unreported income. The message is -- loud mouths shouldn't brag about not paying taxes. Moreover, they shouldn't brag around strangers.

Of course, L. O. D. Mouth never knew why he was audited and, if you're ever audited, you may never know either. The purpose of this newsletter is to help you avoid some of the more obvious situations that can catapult you from 1% to 100% odds in the audit lottery.

For openers, don't cheat! Few people are smart enough or have enough self-discipline to cheat successfully. People who do know how to "cheat well" are not going to tell you how they did it because they are what? Smart! (At least until they get caught.)

Disgruntled former employees, associates, and spouses are the primary source of "squealer" letters received by the IRS. As you might have suspected, the IRS is not required to tell you who the squealer is. It's up to you to guess.

More importantly, if you suspect you may have given someone cause to be disgruntled, you may want to explore corrective action instead of (or in addition to) prayer. For example, you could file an amended return(s) which does not claim Uncle Furd, who died 10 years ago and never lived with you, as a dependent.

Since this is a business newsletter, let's look at what happens in some businesses -- of course, not yours. If the business owner fails to report a substantial amount of the business's gross receipts, and employees are aware of this situation, the owner should think twice before allowing a rancorous situation to develop.

Even if there are no tax deficiencies, a "squealer" letter from an unhappy employee will often cause an audit to begin. We know from L. O. D. Mouth that audits can go in many directions. Stated differently, and even though you would like to use a baseball bat to nudge an employee into leaving, diplomacy is always better.

In our next newsletter, we will discuss what to do before and during an audit.

Copyright 1998
Published by the law firm of Newland & Associates, PLC
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Call us at (703) 330-0000 for a full range of business law and tax-related services.

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