What Trump’s Taxes Reveal About IRS Audits of Small to Mid Sized Businesses

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Written for Milikowsky Tax Law. Originally published by freelegalaid.com on October 13, 2020. 

Recent revelations of President Trump’s income tax payments have brought to light the capacity of wealthy individuals to fight the IRS when that agency audits their Federal Income Tax returns.

While the amounts on the line for potential IRS tax collection are far greater in audits of the wealthiest individuals and corporations, IRS has found greater success going after smaller businesses that will be more likely to lead to successful revenue collection.

What does this mean for your business?  If you are operating on the edges of acceptable tax deductions and find yourself in a tax audit with IRS, you will need to be even more vigilant in defending your deductions, claimed losses, and other tax avoidance strategies.  For most business owners the day to day bookkeeping and finances of their small to mid-sized business are a secondary thought until tax time…  or until they receive an IRS audit letter.

Due to the recent decrease in funding, and therefore resources, business owners have felt that the likelihood of being audited has decreased.  And while it is true that IRS has been underfunded and understaffed, audits are still happening.  In fact, it is largely IRS’s ability to chase after the “big fish” of tax evaders that has lessened. As a result, those with the financial ability to keep IRS at bay, have become the winners in the equation.

With his plethora of accountants and lawyers behind him, Trump has spent the past decade fighting IRS for a $73 million refund.  According to the New York Times report, his claims of millions of dollars in annual losses resulted in his payment of only $750 owed in federal income taxes.

This story from StarTribune.com states that: According to a study by University of Pennsylvania law professor Natasha Sarin and former Treasury Secretary and Harvard University President Lawrence Summers, IRS will fail to collect approximately $7.5 trillion in taxes owed between 2020 and 2029. They suspect that this could be decreased by up to $1 trillion if the agency were able to conduct more annual audits.

With the economy making a slow recovery from the COVID-19 shutdown and the SBA (Also a government agency) looking at billions of loans about to be forgiven, income will have to come from somewhere.  IRS audits will be part of a larger strategy to recapture some of the money that has been loaned out during the pandemic.

Small businesses with PPP loans should be aware that they are vulnerable to additional scrutiny both from SBA, EDD and IRS.  As loans are approved for forgiveness and payroll audit checks are done, if there are discrepancies between the numbers on your PPP application and those on your 2019 tax filings, your business could have inadvertently opened itself (and you) up to criminal liability, IRS audit, insurance fraud (Worker’s Compensation) and EDD audit. THos businesses who think they may have discrepancies would do best to resolve those issues before an audit is initiated.

IRS data shows that people claiming the EITC in 2018 had their tax returns audited at a rate (0.60%), ten times that of taxpayers in the upper-income brackets (0.06%). The earned-income tax credit is a refundable credit paid to taxpayers who earn an average of $20,000 a year. The simpler tax filings of people who receive the EITC, compared to the more complex filings of the wealthy, are luring IRS auditors who are focusing their diminished resources on the easier targets.

If you are concerned about a potential IRS audit, the experts at Milikowsky Tax Law have extensive experience successfully defending our clients against IRS audits and are prepared to help you.  We have defended over 300 businesses in IRS and EDD audits, we keep businesses in business.