Rose Y.C. Huie, C.P.A is a regular contributor at Accounting Software Source. She is a member of the American Institute of CPA’s and the California Society of CPA’s, and has been helping businesses and individuals deal with the IRS for over three decades. In this interview she helps define some of the most common mistakes made when dealing with the IRS. To learn more, visit Rose Y.C. Huie’s website.
1) Rose, tell us what is the Number 1 way people get in trouble with the IRS that can be avoided.
I would say the number 1 way will be not responding to IRS notices. The IRS notices will not go away by themselves. They will just get worse. They are very persistent.
2) Now what are 2-4 other common mistakes people make when dealing with the IRS?
The next common mistakes will be: 1) Not filing tax returns when required, 2) Not reporting all income or 3) Over reporting deductions with no supporting documents.
The IRS has a matching program. They receive reports from all the banks, mortgage companies, brokerage firms, title companies, car dealers, credit card processing companies, other businesses, etc. as to how much income should be reported by each taxpayer by the social security number or tax ID and the IRS will be looking for these amounts in the tax returns filed. If there is no match, they will be sending out notices to those individuals or businesses.
3) Do you see these mistakes being made on personal or business taxes more, or do both individuals and business owners face the same risk of making these mistakes?
I would say both individuals and business owners face the same amount of risk in making these mistakes. Some are intentional and some are accounting errors.
4) What are the final 6 mistakes you find clients making most often?
The final 6 mistakes are: 1) unexplained deposits in bank accounts 2) buying large items over $10,000 with cash such as buying a car with cash, 3) depositing over $10,000 cash at one time into the bank account or a series of deposits close to $10,000 each time, 4) claiming employees as contractors, 5) claiming unusually large deductions in business entertainment, auto, bad debts, home office or employee business expenses or 6) not claiming all the deductions they are entitled to and overpaying their taxes.
5) How does QuickBooks help keep your clients less at risk for making these mistakes?
Quickbook uses a double entry system. If it is used completely and correctly, all bank deposits are accounted for so are all expenses whether paid by check, cash, credit cards or loans. All payroll is reconciled to the checks issued and all sales are supported by the sales invoices and reconciled to the cash deposits. All Form 1099′s received or issued can be reconciled to the details by client / vendor. This will ensure that the accounting for income and expenses are recorded correctly and there will be supporting details for all expenses claimed.