One Provider's IRS Audit Lesson: "Don't Trust Your Accountant"

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One provider in Minnesota who was audited recently found herself in trouble with the IRS because of mistakes made by her tax preparer. The tax preparer deducted her property tax twice, incorrectly treated her employee as an independent contractor, and failed to have her file a Form 1099 for her lawn mowing service.

You are always responsible for the taxes you owe, even if your tax preparer makes a mistake in filing your tax return. In this case the provider directly asked her tax preparer, “Is there anything special I need to do for my helper?” He replied, “No, you don’t have to worry about payroll taxes because it’s different for day care providers.”

Not true. Anyone you hire to help you care for children should be treated as an employee (with few exceptions). This means you must withhold Social Security taxes, federal and state income taxes, and pay federal and state unemployment taxes. You may also be required to purchase workers’ compensation insurance. This is true regardless of how few hours the person works for you.

The provider contacted me for help and I advised her how to defend herself. She was initially very concerned. “I thought I would have to go to prison,” she told me. I reassured her that this would not be the case and helped her make the experience less stressful. Although she did end up owing money to the IRS she estimates that she saved about $15,000 - $20,000, partly from my help and largely because the auditor let some issues go.

Her audit was finally resolved this month and I talked with her today about her experience. “What did you learn from your audit?” I asked. “Summarize your receipts at the end of each month to help you keep track, and don’t trust your accountant,” she replied. “Who do I know to trust with my taxes?” Her tax preparer was simply entering the numbers she gave him onto her tax forms without asking her questions about her business. Although it’s natural to trust your tax preparer to do your taxes properly, unfortunately there are too many who do not do an adequate job. There are many unique tax rules affecting your business and you want a tax professional who is familiar with them.

The provider wrote to me, “I wanted to say thank you for all of your advice while I was going through the audit of my daycare business. I saved a little post-it note with a statement you made to me early on. It said, “Time is on your side”… and it turned out to be very true; as difficult as it was, it was so true? Thank you.”

Every year I revise my Family Child Care Tax Companion for providers using tax preparers. The Companion is a series of worksheets for you to fill out and give your tax preparer that will help reduce errors on your tax return.

What's your IRS audit experience?

Tom Copeland - www.tomcopelandblog.com

Image credit: smarthr.blogs.thompson.com