Dentist Has Questions about an Audit

I'm trying to limit the amount of paperwork and receipts stashed on my attic.

So I am wondering - what happens during an audit?

Say, a typical dental office gets audited.

I don't know, what's an average now, $750K - 1M Gross, 55-65% overhead.

An audit letter comes.

What do they want?

Is there going to be an auditor coming in, or is by mail?

Do they want to look at specific categories, like meals, cars, entertainment, or is across the board?

If your supplies, labs, etc, are at reasonable percentages, do they want to examine those?

If they want to look inside your supplies or labs category, is a charge on credit card statement enough, or do they want actual invoices?

Like, if it says "Schein" or "Staples" or "Joe's Dental Lab", is that enough to convince the auditor it's a legit expense, or do they sift through the Staples or Schein invoices to make sure there weren't extra #2 pencils ordered for the home use?

I guess what I am asking, is it enough to keep only credit card and bank statements for typical purchases, or should we keep every invoice and statement?

It depends....I’ll knock on some wood before I share this....done knocking:

I’ve had 5 clients audited in the last 12-24 months, all on schedule C's. 3 were no changes and one of the 3 was a really aggressive taxpayer though their documentation was EXCELLENT. When I say aggressive I mean some business % of 4-5 cars, most expensive cars, one a Rolls Royce, not to mention a boat, several homes, etc... Again, the DOCUMENTATION was excellent... no change.

I just received a no change, letter on one where the agent had been out FOUR times and hadn't made it past revenue yet, they were scheduled to come out last week for a 5th & 6th day. I wrote a letter to the agent two weeks prior with tome supporting evidence documenting certain revenue they couldn't trace from the previous 4 visits (that's FOUR FULL DAYS) and my letter basically said look, you've been out 4 times and haven't gotten past revenue yet, each time I've had the expense category receipts ready for your review that you've asked for and you still haven't seen them. It's getting to the point of harassment and you're simply running up the taxpayer’s professional fees. I suggest you close the case with a no change letter as every other audit I've had with two agents have been out at most, TWICE. So talk to your supervisor and let me know. The day before he was scheduled to come out again he called me at 5:30 in the evening. He was surprised to find me at work answering the phone. He told me they were sending me a no change letter.

DOCUMENTATION is the key. If you keep good records and good documentation you'll be fine.

The main thing to remember is have your CPA handle the audit, don’t agree to go to the IRS office to meet with the agent no matter how friendly the request seems (I had a client learn this the hard way). As soon as you are contacted by the IRS (or any taxing agency) let them know your CPA will be handling all future correspondence, requests for information, and meetings. The CPA should schedule the audit to be done by mail or at the CPAs office. If you do have to answer questions for the agent, answer only the question asked.

I need a new car, and I need a deduction to limit my tax liability in 2012.  My advisor suggested the section 179 auto deduction to accomplish both.  I have a fairly long commute and am wondering how to make my commute a business use of the vehicle.  If I have a bank right by my house and make my nightly deposits there, will that fly with the IRS (even though there is a bank close to my office).  

My wife is on the payroll and pays the bills and orders supplies at home.  2 of my children are also on payroll and do some of their jobs at home (shredding documents, stuffing take home bags, etc…) I am still leery of the whole home office thing.

Any thoughts? 

Keep in mind the amount you can write off for a vehicle under 6,000 pounds is not going to change your tax liability all that much since depreciation on those vehicles is limited. If the vehicle is 6,000 lbs. or more (gross vehicle weight some SUVs) then you may be able to maximize your tax deduction (Section 179). The key to taking the deduction is to keep good documentation (on business usage). Above all don’t buy a car (or any asset) just for the tax deduction.

These are individualized issues and decisions. If your CPA suggested buying a car for tax reasons then you should be asking them how you go about getting the most out of that vehicle (or vehicles) and running your ideas by them. If they suggested the vehicle as a way to get business deductions they must also have some thoughts on how your vehicle(s) are used for business.

Why couldn't I just purchase the vehicle and get the loan in the business name?  That way, the car is an asset of the business and I only get to use it as the officer of the business.  I wouldn't see this as any different than someone driving a "company car".  

I bought both mine and my wife's vehicles in the business name.... we don't own the cars, the Corp owns them.  This allows auto insurance, gas, maintenance, etc. to all be deducted as well.

Any reason not to do this?

 Many times owners might want to pass their old corp car to a family member then you’re dealing with getting it out of the corp and here in Maryland, it'll cost you sales tax to do so. I've also been told auto insurance on a corp owned vehicle is more expensive than on a personal vehicle.

This first appeared on Dentaltown.

For more information, please contact info@dentalcpas.com

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What Should a Dentist Expect from an Audit?

I am getting audited.

So step one, I am assuming one will get some kind of letter saying get ready to go through hell... but then what?It's only hell if you have poor record keeping skills and you're very disorganized. 

Does your CPA defend your books? Do you have to hire a tax attorney? Do you go to court?It depends. Some audits are mail; they simply want to see your back up for say - donations. Some are a little more extensive where you can do mail or a personal meeting or have them come to you (or your CPA) to go through the receipts.

It's up to you whether you want a professional involved. Many times human nature kicks in and people talk too much. They don't answer the question, they answer the question and then tell a story to boot or they answer a completely different question...or worse, they answer the question incorrectly....that's not to mean they lie, they simply say something they shouldn't or give WAY too much information.

About 2-3 years ago I had an agent that asked a lot of yes or no questions and I answered yes or no. They wanted me to talk my head off.... and it got to a point where they asked me to explain or describe something and I'd reply "can you be more specific", and at some point they'd ask a yes or no question 

If you get to a point on a deduction or a position where it gets difficult you may need a tax attorney and ONLY if something doesn't go your way and you've exhausted your appeals will you decide if tax court is necessary.

These questions may be stupid, but I have no idea how this works....

How many years does the IRS go back through one's books?Generally they can't go back more than 3 unless they believe fraud is involved.

How many years of receipts does one need to keep?We suggest 5 years of normal operating receipts and keep capital assets for as long as you own them and then 5 years from the year of sale.

I am wondering how expensive this can get...I am sure it depends on what they find....Correct and again, depends on how clean your records are and how organized you are. The more organized and complete your records are the lower the cost in most cases. Of course even with the best records if you took a position that gets challenged and disallow it and you believe in it, the more you fight it the more it costs.

In my experience the average cost of an audit that our clients have paid us is probably between $3k-$6k. Of course some can be handled easily for a few hundred dollars and some cost more than 6, usually due to poor records and risky positions on tax deductions.

This first appeared on Dentaltown.

For more information, please contact info@dentalcpas.com

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