Who's Afraid Of The Big Bad IRS?

by: Wayne M. Davies

Who's afraid of the IRS?

Let's face it: We All Are!

And with good reason . . . IRS horror storiesabound, and we all know someone who's beenthrough an IRS audit and lived to tell about it.

So the purpose of this article is to helpcalm those fears. Maybe I can't remove themcompletely, but I do hope you find somecomfort in what I'm about to tell you.

Do you have any idea how manytax returns are audited every year? Hereare the numbers, as provided by the IRS:

INDIVIDUALS — without Schedule C
Gross Income:
100,000 …………… 0.74

INDIVIDUALS — with Schedule C
Sales:
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 onlyexceptions are large C Corporations withassets 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 chancesof 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 toconduct widescale audits. That's just theway it is.

Now, how should this good news about IRS auditrates effect you? I can think of at leastthree ways:

1. When it comes to your attitude toward the IRS,cheer up and take heart. The likelihoodof an audit is slim. I meet people everyday whoappear to be well-adjusted and successful, butjust bring up those dreaded letters, “IRS”, andthey turn into a paranoid basket-case.

There's no need for such irrational fear. You'veseen the numbers. Let the facts control youremotions, not myths and misconceptions.

2. Keep these audit rates in mind when deciding whatdeductions to take. I am not recommending that youcheat on your tax returns, but I am suggesting that youconsider being more aggressive. If the item in questionis not fraud, and if you have at least an arguableposition, these low audit rates lend merit to the oldsaying “when in (reasonable) doubt, deduct it”.

3. The low audit rates should NOT give you reason to become sloppy in your recordkeeping. Please do nottake the attitude, “Well, since there is such a smallchance of being audited, why keep records at all? Who needs all this paperwork?”

Who needs to keep accurate records of income andexpense, 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 accountbalance is an accurate indication of the successor failure of your business, you are mistaken.

Successful business owners keep their finger on the pulseof their business every week. They know how much iscoming in (and why), and they know how much is going out(and where).

Successful business owners maintain accurate financialrecords so they can make sound business decisions toincrease sales, minimize expenses, and multiply profits.

If your attitude is anything less than that, yourbusiness is doomed to fail.

While the chances of being audited are low, so arethe chances of being successful without good records.

NOTE: The above statistics are takenfrom an Excel spreadsheet freely availableat the IRS website. This spreadsheet showsaudit rates for all types of returns foryears 1996 through 2002.http://www.irs.gov/pub/irs-soi/rtctab6a.xls