How to Survive a Veterinary Tax Audit
Veterinary offices often take an array of corporate forms. They may include sole proprietorships, corporations, partnerships, and LLCs. There are an array of audit issues that can arise solely from the corporate form. For instance, in the case of a veterinary personal service corporation (PSC), a flat 35% tax rate applies along while for a qualified PSC (QPSQ) a function and ownership also applies to qualify. Different tax treatment, allowed accounting methods, and qualifications apply for other business entity forms.
Essentially, the tax issues that can arise due to a federal audit by the IRS or a state audit by the California Franchise Tax Board and other agencies are extremely complex and can result in significant tax liabilities. Furthermore, office staff and other individuals who may come into contact with the auditor may unintentionally exacerbate matters with unartful statements or unintended insinuations. Thus, if you’ve been contacted for a tax audit it is essential to contact a tax professional who can assist with audit preparation, discuss the process, and work to mitigate the consequences of the audit. As a fellow licensed professional, a tax lawyer understands how much you have on the line when facing an audit or tax allegations.
Concerns Veterinarians Face in an IRS tax Audit
Unlike many physicians’ offices that receiver their income from insurance company payments for services rendered, many veterinary practices operate on a cash basis. The IRS recognizes that cash payments are common in the industry. Furthermore, the agency also recognizes that cash transactions create a greater potential for abuse. Furthermore the IRS also recognizes that many veterinary practices have adopted computerized systems that permit detailed tracking of income for services rendered and expenditures.
One issue that can arise is when the company’s tax preparer relies solely on bank deposits to reconcile gross receipts. Since these reports do not provide detailed information and checks can be written in the name of the veterinarian, the IRS is particularly sensitive and thorough in checking for income diverted from the business. Thus, the IRS will frequently make use of billing records, patient sign-in sheets, and other ledgers as alternative sources of information to check for unreported receipts. All it takes is $10,000 of unreported income to result in the your audit being referred to a Technical Fraud Advisor whose sole job it is to work up your audit for possible referral to the criminal investigation division of the IRS.
An additional issues that can arise is related to the fact that many veterinarians personally own the building where their PSC is located. They then lease the space to the practice. Absent their involvement in the practice, this income should be characterized as passive income. However, in these circumstances Treas. Reg. § 1.469-2(f)(6) holds that the income should be characterized as non-passive. The failure to account for this important distinction often leads to the vet to taking improper deductions for passive losses.
Use Tax Issues in a California Tax Audit of a Vet
California Board of Equalization (BOE) administers and collects state personal income taxes and corporate taxes. The relevant issue in BOE sales tax audits is commonly centered on the question of whether the veterinarian’s office makes retail sales. The importance of this distinction is that, under California law, retailers are required to obtain a seller’s permit. However, consumers of retail products are generally not required to obtain a permit of this type. Furthermore, the retail sale of goods in California are typically required to collect and remit sales tax. Furthermore, sales and use tax obligations including nontaxable sales and charges for professional services rendered must be reported. What complicates this analysis is that veterinarians are considered to be both a retailer and a consumer of goods.
Additionally a use-tax analysis applies to the purchase of items that will be used or consumed through the course of practice operations out of state. Typically, items purchased for the purposes of resale with a valid resale certificate are not subject to the use tax. However, products originally repurchased for resale that are then used in the course of practice generally give rise to an obligation to pay and remit use tax. Exceptions to general use tax rules include:
- Items for demonstration or display. However, use tax becomes due if the item is later sold
- Veterinary drugs used to assists farmers or others in agricultural concerns receive a partial exemption
- Feed for animals
- Business supplies and equipment
- Qualifying purchases of drugs and medicine
However, use tax errors can create serious consequences. However, appeals procedures are typically available where mishandled sales and use tax obligations or sales and use tax audits go wrong.
Experienced Tax Audit Lawyers Can Handle IRS and BOE Audits
If you are facing an audit by the IRS or California BOE, as a veterinarian, you face high stakes. Federal and state tax obligations are complex and difficult to manage. Furthermore, the appearance of impropriety or willfulness on the part of a professional can be particularly damaging since voluntary or intentional tax crimes are generally considered crimes of moral turpitude. Since most professional licensing or ethics boards are extremely sensitive to issues of this type, tax fraud or tax evasion may lead to the suspension or forfeiture of a veterinarian’s license. If your veterinary office is to be audited, especially where you are worried about underlying compliance problems in the return that could be seen as fraud when and if discovered, don’t delay and contact an experienced attorney to begin preparations. Only an attorney can offer you Attorney Client Privilege which enables you to fully discuss your issues without fear that your attorney becomes government witness number one against you. To schedule a reduced-rate consultation with one of the experienced tax audit lawyers of the Tax Law Offices of David W. Klasing call 800-681-1295 or contact us online.