We were called a few months ago by a client that they are being audited by the IRS for their 2013 Schedule F sole prop business return. They are a Christmas tree “choose and cut” farm in Wisconsin.
What might trigger an audit? All kinds of things. TLC, a one-employee Schedule C business, was audited twice because of about 47,000 business automobile mileage.
- What does an audit due to mileage have to do with a MERP? Well, while they were probing into my Schedule C return, the auditor, located in San Diego, said “While we’re with you let’s look at your Employee Fringe Benefit line.” This is the line in a Schedule C or F where the total MERP expenses are recorded. By the way, the mileage issue was quickly quelled because of my Day-Timer records.
- “How can you?” The auditor asked, “How can you have a cost of labor of $100 and fringe benefits of $12,000?” I told her that I employ my wife. She said “But you can't do that!” So I told her that she better check with her supervisor and get back to me next week. She did and told me that it’s okay to hire a spouse.
- “But how can you?” Then she said that it’s impossible to pay more in tax-free benefits than you pay in wages. So I again asked her to get to her supervisor and check out that arrangement. Next week’s call resulted in, “Yes you can.” Side note: Even if it’s Joe Lunch Bucket and not your spouse, it’s okay.
- “Show me your paperwork.” The dreaded question. I told her I’ll ship the paperwork via PDF to her ASAP. The paperwork included a three-ring Administrative Manual binder and employee folder which TLC prepares for all clients, and an Annual Report to the participating employees summarizing the benefits. All this completes “communication” requirements of ERISA and the DOL.
- “We find no reason. . .” A few weeks later, the nicest letter from the IRS was received stating “We find no reason to adjust your last three years of Federal Tax returns. Note that they actually went back the legal three years, even though their initial inquiry was for just 2008!
So, what did TLC do for the Christmas tree producer?
- Provided them with all past MERP records, which they had not been able to find.
- This was done even though the client had not paid a service renewal fee since 2007.
- The past records might be enough to allay the fears of the IRS. The client has not yet heard the final result, which may come in October or November just when a Christmas tree producer is at their heaviest work load!
- Also, TLC is prepared to provide the client with summaries past the year 2007 if the IRS asks for it. We want to do anything to help the client!
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Contact us at firstname.lastname@example.org or visit us at www.tlcplan.com!