Revenooers Go After “Consultants”

Many folks, particular in our neck of the woods, are “consultants,” of various sorts.  The term can embrace a wide variety of activities, and it seems the Internal Revenue Service has decided that “consultants” just might be productive audit targets.  To that end, the Revenooers have updated their “Business Consultants Audit Technique Guide,” (ATG) to educate auditors regarding how to go after consultants.

The bottom line is that auditors are now expected to look for omitted income from consultants’ returns, not to mention that all income is expected to be reported in the proper tax year.  Auditors are therefore told to look for:

~Lack of internal controls by consultants;

~Good books are records, especially by consultants using electronic software for this

purpose

~Whether and to what extent consultants may be using bartering to create what they

think might translate into some form of nontaxable income

~The shifting or assignment of income by a consultant taxpayer to a related entity.  In

particular, IRS wants auditors to be wary of consultants who might try to shift

income away from their personal returns, or away from returns filed by their

closely-held corporation to some other entity.  IRS thinks to the extent this may

be going on, consultants may be taking a disproportionately small salary from

such entity in relation to the amount of income shifted.  This scheme might be

attractive to a consultant who shifts income to some related entity which possesses

losses or carryovers available to offset the shifted income.

~The taxpayer consultant’s use of a fiscal year end in order to try to defer income

Auditors are told to review the taxpayer’s consulting contracts, being on the lookout for certain information, such as whether the taxpayer is an “S” corporation or a partnership, while the job contract requires the services of a particular employee/owner.

Another area of scrutiny suggested by the ATG is that of travel costs deducted by consultants.  Since many consultants do a fair amount of travel to serve their diverse clientele, auditors will be on the lookout for costs associated with accompanying spouses, and other personal travel excursions.  Not to mention the propriety of associated meals and lodging.

And consultants practicing in the corporate form may sometimes try to escape the clutches of the “personal service corporation,” and its high tax rates.

Consultants:  beware!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at        http://blog.nolo.com/taxes/.

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