A Farm in Illinois recently found out what happens when the books get a little out of hand.
Lots of small businesses have multiple entities, maybe there is an LLC for the property, another for the land, and maybe an attorney recommened another LLC for legal reasons. When this happens, the bookkeeping can get a little out of control as it appears happened in this case and caused a massive disallowance for a perfectly legitimate deduction.
So what happened? Well the property taxes for the farm (the business) were paid personally by the owners, and they claimed it on their personal income tax return.
The problem is that the business should have paid the tax and taken the deduction. That big deduction on the owners personal tax return was likely spotted by the IRS DIF Score. DIF Score is when the IRS uses a rather simple yet complex tool to spot irregularities and takes a further look.
So once the irregularity is spotted, all it takes is a correspondence audit to get the details.
What likely happened is the correspondence audit revealed that the tax paid and how it was deducted was not accurate.
The kicker is, that the bills appear to be 100% legitimate, so if the business had paid the bill or had shown a loan from the farmer and taken the deduction on the correct return, the deduction would have survuded the audit.
The audit did however reveal a few other possible bookkeeping missteps, to the tune of some $14,000,000 in tax, that resulted in about $2,800,000 in penalties. Clearly there were plenty of other errors, but the key takeaway is that a taxpayer may not take a deduction for others. “A shareholder may not deduct as personal expenses those expenses that further the business of the corporation.
Doug Zandstra CPA CFE EA
9040 Town Center
Lakewood Ranch, FL 34202
941 538 5630
dougzandstra@gmail.com