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Posts Tagged ‘Perspective’

With the tax clock ticking down lots of people are finishing up their tax returns. A common question that comes up during this joyous time of year is, “How can I avoid an audit?” Fortunately for most taxpayers the question is far more common than an actual audit. Only around 1% of all taxpayers actually end up facing an audit.
Comforting as that fact is, it is in no way instructive. Knowing what is more likely to trigger an audit can go a long way to avoiding one. Avoiding these triggers will not guarantee that an audit will not occur but it will reduce the chances of one. While all of the reasons that the IRS launches an audit aren’t known, crunching the statistics of past audits does demonstrate some clear triggers.
High deductions – Any deduction that is proportionally high to the taxpayer’s income usually constitutes a red flag. Determining what’s high is the trick here. The IRS publishes an annual book, “Statistics of Income.” Although the book gives ranges for typical incomes some logic needs to be applied. If a taxpayer is at the lower end of a particular income range but claims the upper limits of deductions associated with that range then that deduction may still trigger an audit review even though the deduction is technically within the accepted limit.
High Income – Although a higher income should be considered an advantage under any other circumstance, considered from the perspective of prospective audits it is most certainly a disadvantage. And the chances of an audit jump up significantly with each income level. Past audits tell us that the chances of an audit for taxpayers making less than $100,000 is 0.93%. For incomes over $100,000 the chances jump to 1.77%, over $200,000 brings the odds up to 2.87% and over $1 million in income brings the chances of an audit to a whopping 9.37%!
Cash Income – Any profession that deals with a lot of cash, such as waiting tables, tends to spark the curiosity of IRS audit agents. One of the first things they compare in cases such as this is bank deposits vs. claimed income.
Self-Employment – Because self employed taxpayers are constantly keeping an eye on their bottom line they tend to be aggressive at writing off expenses. While there are many legitimate reasons for doing so the IRS likes to verify these deductions.
While these are some of circumstances that may trigger an audit they do not necessarily guarantee one nor will avoiding them remove all possibility of one. The best defense against an audit is to always expect one. Taxpayers should make sure that their deductions are legitimate and reasonable. They should also keep well ordered records and receipts.
However never having to face an audit is certainly the best circumstance. Keeping these triggers in mind can help taxpayers reduce the risks of that happening.

The recent sub-prime mortgage crisis and the interlinked subsequent turmoil in the financial markets has generated many concerns in businesses and the general outlook on the economy. The question we want to answer is: will it affect small businesses?

There is no easy answer to this question. But let?s examine the different drivers at play.

On one hand, we have a mortgage market that?s become a lot tighter. This will make it increasingly harder for people to get mortgages. Traditionally, borrowing against your home has been one of the most common ways of funding a new businesses (according to a survey conducted by the Federation of Small Business 25% of start ups use bank loans as their main source of funding, while 49% use bank overdrafts). So these facts would indicate that the credit crunch will have a knock-on effect on small businesses by affecting entrepreneurs? ability to raise funding.

Equally, a lot of people who are already on the property ladder will find that their equity is being squeezed by the drop in house prices, so again making it harder to gear up.

On top of this, banks have gone into saving mode, switching from looking aggressively for borrowers to looking for lenders. So even with property to secure against, chances are that people will generally face it more difficulty to get a bank loan.

On the other end of the food chain, larger businesses, who are already geared up may find it harder to service their debt especially if consumer spending is affected (of which there are no clear signs as yet). Consumer spending accounts for about 70% of the GDP so if that goes down? it pretty much all goes down.

With the above in mind, the number of business startup is the next year is estimated, by some, to drop. Barclays bank estimates that new business formations will drop from 420,000 a year for the past three years to about 360,000 next year.

I don?t share that view. Seemingly paradoxically I believe that the above will actually lead to a growth of the small business sector. The small business sector has always been the most resilient in the economy, benefiting from the lack of a cumbersome fixed cost base that burdens large businesses and with little or no debt to service.

There is the question of course of ?how do we finance a small business without a buoyant property market to piggy-back on?? Well considering that over the past three years, despite abundance of cheap credit, 40% of start-ups (according to the FSB survey 2006) used own savings and retained profits to part-finance their growth, one can argue that that figure will increase in times when credit is tighter and when people are also nervous about their employment prospects.

Added to this is that fact that entrepreneurs today have more tools at their disposal to help them ?boot-strap? their venture than any other time in modern business history. Technology of course is the underpinning force behind this, enabling people to work remotely even deploying virtual teams without having to incur the traditional set-up and costs. Sites like ours ? www.peopleperhour.com, we?d like to think, are making a distinct positive contribution to that.

Personally, I think the problems of the current financial crisis can be attributed to one key fundamental factor that, unfortunately, is an innate human trait: greed. The past number of years has seen an excess liquidity fuelled by cheap credit, which has led to a frenzy of over-spending and over-exposure. What has this led to? Large organizations eating up more than the can chew. Like Northern Rock.

This downturn will be a smack on the face to those who have got too greedy. And those will be naturally the ones at the top end of the food chain. As people become more nervous of the situation and their job security in those organizations, I think more people will resort to embarking on their postponed hidden desires to branch out on their own.

After all there something uniquely beautiful and paradoxically uplifting about a bleak economic climate: there?s less to lose!

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