What records must I keep so I won’t be bothered by the IRS? I’ve been audited because of high mileage and entertainment costs [I’m a manufacturer’s rep,] and I don’t want to open any more windows and start flying red flags if it’s only to have a MERP! : FAQ/Blog/Solutions
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What records must I keep so I won’t be bothered by the IRS? I’ve been audited because of high mileage and entertainment costs [I’m a manufacturer’s rep,] and I don’t want to open any more windows and start flying red flags if it’s only to have a MERP!

by Tom Luker on 05/01/15

In the past we’ve discussed having a properly-administered plan and audit protection.

  • Proper records, including ER to EE communications, non-discrimination rules and other rules make it imperative that the business do the MERP/HRA by dancing through all of the same hoops of a 1000-EE business.
  • The turn-key administration procedure provided by a good TPA will give the business the assurance that the plan meets all of the rules.
  • These rules are outlined by the alphabet soup of the IRS, ERISA and the DOL [Department of Labor.] ERISA stands for the Employee Retirement Security Act of 1974, and all future amendments. Some people think that ERISA really stands for “Every Ridiculous Idea since Adam!” This may be, but they’re still THE RULES.
  • One example of how we have helped our clients is with a 1-EE business where the only EE/Spouse was paid a $100 W-2 wage each December.
  • The total “wage package” of course, was actually enhanced with over $9,000 of tax-free [not on the W-2] benefits which lowered the taxable profit of Schedule C [increased spendable income to the family.] This really only amounted to about an “hourly” wage of less than $20, assuming 500 hours of work per year [10 hours weekly on the average.] 
  • In this particular case the client was indeed audited for having over 47,000 automobile miles on his Schedule C and simply had to prove he kept good trip-records in his daily planner. The IRS auditor in San Diego readily approved those records [catch the “proper records” theme.] But she asked the sole proprietor how he could actually hire his spouse?
  • We asked the auditor to go back to her supervisor and see if spousal employment is okay. Next week, the auditor called back and agreed. But then asked how could he have a “Cost of Labor” total of only $100 and yet an “Employee Fringe Benefits” line of over $9,000.
  • Again, with our help, the auditor was asked to go back to her supervisor. The third week she called back and said, “Okay, but show me the paperwork!” [Sort of like, “show me the money.]”
  • So, we sent copies of the three years of paperwork that included enrollment, plan renewals, annual EE communications including reimbursement request approvals, brief job description, etc.
  • The next thing the client received from the auditor was a letter stating, “We see no reason to change your last three years of tax returns!” Good news from the good ol’ IRS, indeed! A copy of that letter is in the files at TLC! If you wish to see a copy, we’ll send it as the client has given permission.

“Improving YOUR Bottom Line is OUR Bottom Line”

Contact us at tlcplan@outlook.com or visit us at www.tlcplan.com!

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