Advisors be forewarned: your small business clients are more likely to be audited next year. The IRS is beefing up its ranks of auditors, and doing more audits, according to a leading accountant addressing the Financial Planning Association of New York’s spring forum.

“With everybody losing jobs, the biggest hire is the taxing authorities. They are hiring left and right to do audits,” said Mark Josephson, partner at New York City-based Murray & Josephson. “Contrary to what you might be reading in the press, when I speak to an auditor, and they say, ‘Yeah we just hired 31 people in our department,’” he said.

He added that as the IRS is auditing more taxpayers, including small business owners, the audits are taking longer because the agents are demanding more details. He said on every audit he’s seen recently, agents have demanded every brokerage statement, every bank statement, and any other type of financial statement. He noted that they always had a right to demand this documentation, but only asked for it occasionally in the past. “One of the main reasons is they want to add up all the deposits and make sure you’re picking up all your income. The audits are becoming more and more tedious,” he said.  

In a session entitled, “Tax Planning for Individuals and Small Businesses in a Changing Environment,” Josephson and his partner Martin Murray discussed the increase in new regulations for small businesses. In this increasingly complex environment, one of the main messages to advisors was “protect yourself.”

Josephson said that compliance with all the new federal rules is becoming “very crucial.” He added that it is becoming very expensive to comply with all the new rules, and many small business owners, lacking the cash flow to do so, opt to skip much of the compliance. Nevertheless, he urged the advisors with small business clients leaning towards opting out to be careful. “The thing is whatever you do, you want to make sure you protect yourself.”  He noted that one of the biggest areas of malpractice is giving advice when they shouldn’t. “Just because you tell them what to do and say, ‘Talk to your accountant,’ they’re not going to remember you said, ‘Talk to your accountant.’ They’re going to remember what you told them off the cuff.”

Murray highlighted one particular new disclosure requirement that is getting extra scrutiny: small businesses must disclose if they were required to issue 1099 forms to outside contractors, and then disclose whether they did or not. He said many do not want to bother with the extra chore and expense of issuing these forms, and skip it. If the small business owner then declares on her taxes that she was not required to issue 1099 forms, and she should have, it’s perjury, he said. At that point, the client is facing both penalties and possible criminal charges.

Josephson also outlined changes to the Federal Tax Provisions, which will be effective next year. They include a new 3.8% Medicare Tax on unearned income, an increase of 0.9% on the Medicare Tax on earned income and an increased threshold for itemized deductions of medical expenses, to 10% of adjusted gross income, up from 7.5%. 

Elizabeth Wine writes for On Wall Street.