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Three Hundred Billion Dollars

By Greg Auerbach, MBA

Yes, it is a lot of money. Yes, it’s only about half of the numbers thrown around in September to bail out the credit markets. And yes, it is a number that should be very important you and your practice.

Three Hundred (actually around Three Hundred Forty-Five) Billion dollars is roughly what the “Tax Gap” – the estimated amount that individuals and corporations owe but do not pay, at the very least, on a timely basis. Not mentioned in the figure is also billions of dollars not paid through corporate loopholes. As the government continues to deficit spend, works to shore up the credit market and looks to stimulate the economy, this figure looms larger with more eyes are turning to the IRS to collect – meaning more audits could be on the way.

Here are some common practices we see in dental practices that could trigger IRS scrutiny.

Independent Contractor Associates
The IRS has re-classified the Independent Contractor/Employee test into three main categories:

  1. Behavioral Control
  2. Financial Control
  3. Relationship of the parties

Rather than go into all of the issues with each of these categories. Contractor status can be rejected by IRS if the practice does any of the following: 

  • pays the associate
  • provides patients to the associate.
  • does the scheduling for the associate
  • determines the associate’s working hours

Unreported Income
There are two actual classifications for unreported income – actual cash that goes unreported and personal expenses that are passed as practice expenses. The first does not take any explanation and, be aware that the IRS can usually figure out that cash is being taken home.

The second, is easy for the IRS to prove once audited (through receipts and statements reconciliation), but may be easier to conceal on an ongoing basis. That said, for both cases, the IRS is aware of normal practice expenses and it becomes pretty obvious if laboratory and supply expenses are much higher than the national norms as a function of gross income that the possibility of unreported income exists.

S-Corp Distributions
This may be the easiest for the IRS to conclude as your owners compensation is explicitly stated on your tax records. The red flag here is a “less than normal owner’s compensation” so to avoid paying FICA and Medicare supplements. If you have formed a strategy of taking a very low salary with a large bonus or dividend, it may be time to take a second look at that.

Take these points to heart and, coming into the New Year, think about how you plan for 2009. We have been strongly advised by those who work closely with the IRS that small businesses are going to be much more carefully examined in the upcoming year thus heightening the risk of an audit. Irregularities this year can also trigger a review of previous years as the patterns of irregularities may be consistent.

So, please take necessary steps now and evaluate your situation. Do what you can now to avoid an audit. The possibility of having to pay current and back monies owed as well interest and penalties due to an audit is becoming ever greater as pressures to collect and therefore offset expenditures and bail outs rise.

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