Now that the IRS plans to raise the bar for tax preparers, what can you as a small business owner do to protect yourself from being caught up in the IRS' new rules?
The IRS says that while most preparers provide honest service to their clients, taxpayers must be careful when choosing a preparer. Even if you hire someone to prepare the tax return for your business, you as the taxpayer are ultimately responsible for all the information on the return.
Never just sign a blank return to be prepared by your tax preparer and always review the return before you sign it. Be sure to ask questions on entries you don't understand.
Here are some tips from the IRS regarding how to pick a tax return preparer:
- Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
- Avoid preparers who base their fee on a percentage of the refund.
- Use a reputable tax professional who signs the tax return and provides a copy.
- Pick a preparer that you know will be around to answer questions about the preparation of the tax return months, or even years, after the return has been filed. Be sure it's not someone who just sets up a storefront office for a few months at tax time.
- Check the person's credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
- Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
You may hate the idea of bringing in your receipts, but reputable preparers will ask to see receipts and will ask multiple questions to determine whether expenses, deductions and other items qualify. You may think they are acting like IRS cops, but by doing so, they are trying to help you avoid penalties, interest or additional taxes that could result from an IRS audit.
Common Home Business Tax Schemes
Some tax preparers may recommend schemes to help your small business avoid paying taxes, but these schemes are well known by the IRS. Most of these involve claiming personal expenses as business expenses.
Here are some common schemes the IRS watches for:
- Deducting all or most of the cost and operation of a personal residence. For example, placing a calendar, desk, file cabinet, telephone, or other business-related item in each room does not increase the amount that can be deducted.
- Paying children a salary for services, such as answering telephones, washing cars or other tasks and then deducting these costs as a business expense is not allowed.
- Deducting education expenses from the salary wrongfully paid to children as employees also is not allowed.
- Deducting excessive car and truck expenses when the vehicle has been used for both business and personal use is not allowed.
- Deducting personal furniture, home entertainment equipment, children's toys, etc., is not allowed.
- Deducting personal travel, meals, and entertainment under the guise that "everyone is a potential client" is not allowed.
If a tax preparer recommends that you claim deductions for what would normally be personal expenses, you should be very suspect. You best bet is to find a new tax preparer.