Hello everyone and welcome to the Visibility Reports Series of Expert Interviews. Every month we’ll be interviewing renowned experts in business, finance, sales, and marketing to give you new insights into your business and new ideas for accelerating your company’s success.
My name is Jennifer Rodriquez, and I’m your host and the President of Bookkeeping Matters. This month I’m interviewing Certified Tax Coach David Tuck of Anvil Tax in Portland, Oregon. As a former income tax auditor for the IRS David knows firsthand all about the numerous errors and mistakes made by small business owners when filing their tax returns, and he has devoted the last few years helping people eliminate those costly mistakes, reduce their overall tax liability, and decrease their audit risk. David, thank you for participating in the visibility report series of expert interviews; it’s a pleasure having you here.
David Tuck: Thanks, Jennifer, for having me. I’m excited to be on this call.
Q: Great. So let’s get right to it. David, in your experience what are some of the common mistakes small business owners make that increase their chance of being audited by the IRS?
A: That’s a loaded question, Jennifer. There’s a lot to that. And looking at why the IRS is auditing and what’s going on with the world of the IRS. And so as we know that we’re in this recession, companies are laying people off, outsourcing to third world countries happening, so a lot of income is moving overseas. The tax system is being decreased, because people aren’t making the big salaries anymore
So the IRS is hiring lots and lots of employees to go out there and audit people and to generate more and more revenues to compensate. And so there are a few key elements that I see, key points, red flags, that do increase audit risk. One of them right now is on a Sub S Corporation level.
So if you have a corporation and you need to pay yourself a reasonable salary, so the IRS is going after corporations that don’t have reasonable salary compensation. So that’s one of them. So it’s actually a big deal. A lot of people file corporations, because they see the tax advantage, but they miss the key point of having a reasonable salary and paying themselves.
Another big, big audit red flag is just the (2:30) structure that you have. It’s no secret that the IRS audits heavily scheduled C’s or sole proprietorships, also file single member LLC return, rental properties, and farms, so schedule E’s and F’s. So statistically, and the government puts out statistics every year about what demographic of tax payers have been audited, and every year schedule C’s, E’s, and F’s are the highest audited tax (3:05).
There are a lot of reasons for that. A lot of them are speculations on my part, but in the IRS when I worked there I probably worked on small businesses under $300,000, and they were schedule C’s, E’s, and F’s. So I’ve been down to many conferences at the IRS. Kristen Bond, who’s a Territory Manager, she was talking about telling a group of 200 preparers last year, “Listen, it’s no surprise that we’re just auditing more and more scheduled C’s, E’s, and F’s. So don’t be alarmed when your clients get those notices from the IRS, because that’s their agenda, that’s what they’re going after.”
So we could probably move onto the next question.
Q: Okay. Well then given that these audits are probably going to be increasing what steps can a small business owner to help descend their deductions in the event of an audit?
A: That proactive approach is the key. A lot of people don’t think that they’re going to get audited. I appeal to people to think a little bit differently. Think proactive instead of reactive. The things that you’re doing now, the purchases and the transactions that you’re doing now in your business, could be audited two years or three years from now. So if you have this mindset of this transaction that I’m doing or this purchase that I’m buying how is that going to be looked at and basically discriminated against by the IRS?
It’s an interesting take, you go in to an audit, and they basically disallow the expense, and they say, okay, prove that it’s paid, and that it’s a business expense, and that it was correct for that to be reported and be deducted here. Basically they’re saying that you’re guilty until proven innocent. They won’t tell you that, but that’s how it seems. It’s frustrating because you have to prove that you are innocent basically, that the expenses and the receipts that you have actually do go on the tax return.
So in defending yourself in these deductions that you want to be prepared and proactive and documentation is the key; it’s so key in having good documentation. They say accounting is the language of business. Well what does accounting boil down? Numbers, details, ratios, facts, figures. So having good accounting of your business transaction you’re going to be way further ahead.
I think accounting and bookkeeping is something that most people rather not do. It’s not making them income. It’s costing them money, because they got to keep track of it. It’s not exciting that people just rather put it off until the end of the year and not deal with it and just quickly get through it. But the IRS does care, and there are big penalties, and interest, and lots of headaches of going through an IRS audit.
So again, I recommend being proactive instead of reactive, thinking about what you’re doing with these transactions and receipts currently and how’s that going to affect an audit two years down the road. So if you’re being proactive in thinking about an audit then there’s less stress. A lot of people stress out about an audit, because of the unknown. Well usually because their books and records unknown. They don’t know what’s going on with them. So having a good bookkeeping system, hiring a professional bookkeeper, like yourself Jennifer, will really, really help.
Q: Okay, next one. So let’s say someone listening to this interview has taken your advice to heart and wants to start being more proactive about their bookkeeping and about their tax situation. They want to make sure that they can get all the tax deductions that they qualify for. In your experience what is the biggest tax deduction that most small business owners miss?
A: When I look at what’s the biggest expense that most families and small businesses have, and I would say that it’s medical. Medical continues to rise. I think people spend more on medical than they do on housing and living. Medical is expensive. Healthcare is really expensive. There’s a lot being done about healthcare reform, but everybody has seen their premiums increase in the last year. They’re going to continue to increase, because the new legislation is like capping that, so the insurance companies are increasing it now before it gets capped.
So medical – you can hire your family; you can take 100% medical reimbursement and be able to deduct it on your tax return instead of losing a majority of it to different phase outs. So having a proactive strategy of like hiring your family, or having a corporation, having multiple entities – often I’ll come into a situation where somebody just has one entity where they’re just putting all their income and expenses through it when there could be multiple entities, because there’s multiple streams of income, there’s multiple functions to one business. It’s legitimate that you can separate those out.
Well one of those streams of income could be an entity that has medical reimbursement associated with it, which covers the family, it covers employees, so it’s different strategies. But I think one of the biggest deductions that people miss is taking advantage of all the medical that their incurring.
Q: Okay. I think that’s excellent, excellent advice. So I’m pretty sure that most people aren’t aware of some of these additional things that they could be working towards deducting on their tax return. But I’m also fairly confident that people are trying to deduct things that they have absolutely no leg to stand on if they were to try and defend that in an audit. So in your experience what are some of the expenses that small businesses try to claim that don’t really qualify at all as tax deductible?
A: Well, see and again that’s where it boils down to documentation. They say in law that possession is 9/10th’s of the law. But I think that’s similar and it’s true with taxes. That if you have the right documentation, everything’s in order and substantiated, then you’ve got a really good leg to stand on. That 9/10’s holds up. So again, where having a good plan, being proactive, knowing the rules, knowing the laws, and taking those practice steps now.
So like for instance in medical, somebody might write off all their medical, but they might not have the proper documentation in place. They might not follow all the rules and guidelines, because maybe they aren’t aware of those.
I feel a lot of times when I was auditing meals, entertainments, trips, vacations, I talk a lot about deducting your vacation as a business expense, so it’s actually changing the order of that and saying if you’re taking a business trip can you make a vacation out of it versus I’m taking a vacation, and I’m going to make a business trip out of it. So switch those around. Those little minute details matter.
So it’s not necessarily what things are people claiming that they shouldn’t be claiming. I think it’s more of how are you documenting those items on the tax return. So I know people would go to Hawaii, for instance and while they were there they were visiting a real estate agent. You’d go and visit other real estate agents or investment properties or whatever. But he did that while he was there, and he planned the trip while he was there versus being back like in Portland before he went and made connections and designed an itinerary and made it a business trip and then went there. Versus like I went there then I made it a business trip. That’s not going to fly.
So it’s just that whole purpose. Are you going to like Las Vegas for a convention or are you going there for vacation and then you happen to go to a convention? So it’s just a mater of like how do you document it.
Another thing that I’m seeing though – here’s a big mistake. It boils in the taxes, and not necessarily with the IRS now, and it’s more of long-term planning, but it’s retirement planning. This is something that I’m seeing more and more of where people are taking deductions now for their retirement savings accounts. But in the future they’re going to have to pay tax.
So I’ll go through examples with people and say, “Listen, if you deduct $4,000 into your SEP now for 20 years I can save you $50,000 on your taxes. However, that $50,000 is going to grow to be about $250,000, and you’re going to pay $100,000 in tax or more later on.” So in these examples I’ll tell you, “Listen, you’re trading 50 cents on the dollar. You’re saving 50 cents now to pay a dollar later. So that’s huge. It’s like those are IRS issues, but those are big tax dollar issues. Let’s think through retirement plannings, and I work a lot with financial advisers to like say, “What’s going to make the most sense for this particular client over time?”
Q: Right. Yeah, because I know that’s pretty much the common thinking now that if you have too much income at the end of the year you need to pump out your retirement funds and do the maximum contribution that you can so that you can reduce your taxable income for the year. Obviously, a lot of people don’t know about thinking it through to the end and seeing how it’s going to be taxed 20 or 30 or 50 years on when they want to take that money out of their retirement fund.
A: Or when they pass and they give it onto their kids how much is the government going to tax it?
Q: Right, okay. Excellent. All right, well we’ve reached the end of the interview. Thank you so much, David, for taking the time today to do the Expert Interview Series with me. You’ve given everyone a lot of excellent information. If any of the listeners want to learn more from David or setup and appointment to do some of your tax playing you can learn more about David Tuck and his company Anvil Tax at www.anviltax.com. You can reach David by email as well at email@example.com.
Thank you so much for agreeing to do the interview, David. You have been phenomenal.
A: Thanks for having me.