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Watch Those Deductions

A recent IRS Notice of Deficiency was sent to Joseph D. Scully, Jr. requiring him to pay additional tax, fines and penalties of $26,000 for a three period. This case was resolved in the U. S. Tax Court for an amount approximate to what the IRS was seeking. The main problem appears to be one that many of us have trouble with, lack of consistency. We all start out with good intentions, but over time, appointments, disorganization, forgetfulness and finally abandonment of your record keeping can occur. This is a problem that happens to many business owners and when it happens to a 501c(3) entity it can have even worse ramifications than fines and penalties, it can lead to possible revocation for failing to follow IRS code or for private benefit/inurement infractions. 
     The top five issues that occur with deductions are:

 1. Stated business purpose is nonspecific or completely omitted

     This generally occurs when the records for an expense are not descriptive enough. In a Non-Profit this could be anything from not listing mileage and its purpose to a meal that lacks description of purpose. 

 2. What exactly was paid for (describe the purchase)

     Receipts that contain little or no description of the purchase other than a grand total will surely be disallowed unless there is other corroborating evidence to back up the purchase. 

 3. Records unclear or confusing

     Be specific. Nothing says purchased for personal use more than records that are puzzling as to their business purpose or vague on why the purchase was even necessary. 

 4. Records incorrect

     Invoices that do not match checks or debit card statements that have no complementing receipts can lead an examiner to dig deeper into your business than they were initially inclined to. Mismatched documents scream of possible deception and demand further inquiry. 

 5. Business purpose inappropriate

     This is an area that has tripped up many a non-business purchaser. If you run an organization that distributes educational information on the ecology of the water runoff and the dangers of pesticides, would you have a business expense for ten gallons of Monsanto’s Round Up? Probably not and this generally would send up a red flag. 

     My advice is a two point plan to stay ahead of the curve. First, it is advisable that anyone in the organization that purchases or has an expense account keep a basic accounting program on their device. Something like Peachtree or Quicken, even if it is a simple personal version, can be easily set up so the user may rapidly record the specifics of a purchase and the good thing is, these programs take care of minor details that people find tedious such as recording dates and other pre-programmable revolving facts. Just be sure the program is either compatible with company software or can transform the data into a version that is. Second, start a random check system. Many charity organizations, because they have employees that are considered “family”, fail to recognize when a problem begins. By problem, I mean an employee that starts purchasing for personal gain and other deviant behavior. My suggestion is to perform random clarification checks on the data your employees are giving you or, once a year retain the services of a forensic analyst to do a quick run through your system to look for anomalies. Not only will this help with the IRS, it will also help with your bottom line. 

$35p/h

Ernest T.

Taxation/Accounting/Excel/QuickBooks/Fraud Investigation

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