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FINANCIAL
when the IRS comes knocking...
By Bennett Allison, CPA, Shareholder
The last thing a medical practice wants to face is an IRS audit. Fortunately, audit rates are low (around 1 percent),
and IRS audits are the exception rather than the rule. However, if your practice is unlucky enough to be audited,
there are three important points to remember.
Excellent books and records are essential potential abuse and requires taxpayers to substantiate deductions
Well documented bookkeeping and records are going to be your through adequate records with the amount of the expense, the time
and place of the expense, the business purpose, and the business re-
best assets if your practice is selected for audit. If an IRS agent sees lationship of the person(s) associated with the travel, meals, and en-
an organized set of books, he or she is likely to perceive that your tertainment. For example, a medical practice pays for hotel costs of
practice is more compliant which may cause the examination to be several of it doctors to attend an out of town conference. A credit
curtailed. Conversely, a messy set of books will be more difficult for card statement showing the payment to the hotel would not be ad-
the agent to follow and create a real or perceive belief that additional equate evidence. Instead, a bill from the hotel showing the various
examination is needed. components of the hotel charges is required. The key point with
travel, meals, and entertainment is that the documentation require-
Through an IRS audit, taxpayers are required to provide supporting ments are more stringent and require those who maintain the
documentation (typically for expenses) for their bookkeeping. It is records to adequately understand the rules.
certainly helpful to have canceled checks to document your various
payments to vendors and suppliers. However, do your records also in- appointing a third-party to represent you
clude items such as purchase orders, bills of lading, and receipts? If Taxpayers have the option to have a third-party representative
not, the IRS agent may understand that you have made payments but
not know why the payments were made and attempt to deny the as- conduct the audit on their behalf. A third party representative is au-
sociated deductions. It is, therefore, essential that your practice main- thorized by presenting a completed and signed Form 2848, Power
tain not only bank records but other supporting documentation that of Attorney and Declaration of Representative, to the IRS. Consid-
corroborates the bookkeeping entries. In fact, IRS agents are willing ering the stress that an audit can have, it is generally a good idea for
to overlook an unsupported deduction here and there if they see that a taxpayer not to handle the examination directly. In most cases, a
most of the other deductions are well supported. practice’s CPA can assist with an examination, and it is typically best
to have the CPA work on the examination from the start. A CPA
Another important point to note is that certain expenses are help can help present the available information in the best light and
treated differently for income tax purposes. For example, life insur- also take the emotion out of the examination process.
ance is typically a nondeductible expense for income tax purposes.
If the practice’s books simply report “Insurance Expense” with no Although rare, an IRS audit is still an ever present and daunting re-
breakout, then the income tax return may be inadvertently deduct- ality for medical practices. With good books and records, especially
ing nondeductible life insurance payments. for travel, meals, and entertainment and strong professional CPA rep-
resentation, your practice can make the most of a difficult situation.
If the bookkeeping and record keeping processes in your practice
are deficient, action should be taken now to resolve these weaknesses. Bennett Allison, CPA, CFP™ is a shareholder at Sol
Otherwise, your practice may be scrambling to repair books on the Schwartz & Associates, P.C. (cba@ssacpa.com). He has
eve of an examination and trying to find supporting documentation over 20 years public accounting experience serving indi-
that is no longer available. viduals, corporations, S-corporations, partnerships, trusts,
estates, and non-profit organizations. In addition, Bennett works with
Travel, meals, and entertainment a high concentration of physician practices and high net worth individ-
Travel, meals, and entertainment are seen by the IRS as an area uals. Contact Bennett at (210) 384-8000 Ext. 138.
with high potential for taxpayer abuse. Not surprisingly then, a spe-
cial Internal Revenue Code provision (Section 274) exists to combat
36 San Antonio Medicine • October 2016
