Who's afraid of the IRS?

Let's face it: We All Are!

And with good reason . . . IRS horror stories abound, and we all know someone who's been through an IRS audit and lived to tell about it.

So the purpose of this article is to help calm those fears. Maybe I can't remove them completely, but I do hope you find some comfort in what I'm about to tell you.

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

INDIVIDUALS -- without Schedule C
Gross Income:
< 25,000 ................ 0.63%
25,000-49,999 ........... 0.23
50,000-99,999 ........... 0.27
> 100,000 ............... 0.74

INDIVIDUALS -- with Schedule C
Sales:
< 25,000 ................ 2.63%
25,000-99,999 ........... 1.13
> 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 only exceptions are large C Corporations with assets 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 chances of 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 to conduct widescale audits. That's just the way it is.

Now, how should this good news about IRS audit rates effect you? I can think of at least three ways:

1. When it comes to your attitude toward the IRS, cheer up and take heart. The likelihood of an audit is slim. I meet people everyday who appear to be well-adjusted and successful, but just bring up those dreaded letters, "IRS", and they turn into a paranoid basket-case.

There's no need for such irrational fear. You've seen the numbers. Let the facts control your emotions, not myths and misconceptions.

2. Keep these audit rates in mind when deciding what deductions to take. I am not recommending that you cheat on your tax returns, but I am suggesting that you consider being more aggressive. If the item in question is not fraud, and if you have at least an arguable position, these low audit rates lend merit to the old saying "when in (reasonable) doubt, deduct it".

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

Who needs to keep accurate records of income and expense, 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 account balance is an accurate indication of the success or failure of your business, you are mistaken.

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

Successful business owners maintain accurate financial records so they can make sound business decisions to increase sales, minimize expenses, and multiply profits.

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

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

NOTE: The above statistics are taken from an Excel spreadsheet freely available at the IRS website. This spreadsheet shows audit rates for all types of returns for years 1996 through 2002. http://www.irs.gov/pub/irs-soi/rtctab6a.xls