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Quickbooks and the IRS Audit

This Article Will Focus On bringing awareness to the fact the Internal Revenue Service (IRS) now has the power to ask for a copy of your QuickBooks file as part of an IRS Audit.

irs audit

The Dreaded IRS Audit

The first thing you need to know is Bad Construction Bookkeeping Practices raises red flags. Let me share a short story about one of the tools the IRS, banks, performance bonding companies, investors, accountants and other interested parties use to analyze the financial health and well-being of a company. It is the use of ratio’s to test the validity and truthfulness of a company’s financial reports.

As I understand it in 1931 the IRS took down the alleged gangster Al Capone by “Reverse Engineering” his financials. Essentially the IRS collected receipts from everywhere that Al Capone spent money including his tailor, Marshal Field and Company, hotels, restaurant and food suppliers and more.

Using the information gathered the IRS was able to make a compelling case from the bottom up of his annual income. And the rest as they say is history.  In October 1931, Mr. Capone was convicted and sentenced to 11 years in federal prison which included Alcatraz. He was released after seven years and owed $215,000 plus interest in back taxes.

Going back in history to 1914 the Robert Morris Club (RMA) was formed to help businesses and bankers exchange credit information. It was named after Robert Morris who was a signer of the Declaration of Independence and was believed to be the primary financier of the Revolutionary War.

The RMA developed several tools among them was a system of Ratios that we use today to study financial statements of all companies in all industries.

The IRS Audit and Small Business App

Small Business App

For example if all Plumbing or Mechanical Contractors doing primarily new construction report they spend on average 20% of their annual sales income on direct labor costs then that information becomes very useful.

Now we can compare a Plumbing or Mechanical Contractor with annual sales volume of $500, 000 with one that has $5,000,000 by converting every number on any financial statement to a ratio.

With just one number like direct labor costs you can estimate a Plumbing or Mechanical Contractor’s annual sales if you know the ratio. It is simple algebra (Direct Labor Cost divided by Ratio = Approximate Annual Sales).

For example if a Plumbing or Mechanical Contractor tells you they spend $10,000 a year on direct labor then do the math ($10,000 / 20% = $50,000) and you will know they should be grossing approximately $50,000 a year.

There is a whole lot more to this that can be covered in one article and in fact I have invested a lot of time, money and energy studying these concepts and learning to apply the lessons learned to linear programing and decision modeling in order to develop what-if-scenarios used to forecast net income equations for many individual construction companies and still feel as if I have only scratched the surface.

That is essentially how the IRS took down Mr. Capone. They gathered as many numbers regarding his expenditures and using some of the tools

The IRS Audit and Public Enemy #1

Public Enemy #1

developed by RMA and other sources they were able to “Reverse Engineer” Mr. Capone’s annual income.

There is a lot more too this and if you ever wondered why sometimes your loans, lines of credit and performance bonds get approved or turned down and if it every seemed screwball and not based on anything that made sense to you I am here to tell you it is a science of accounting that has little to do with your charming personality or what good friends you are with your banker or your bonding agent.


If You Know The Answers The Questions Will Not Bother You – Randalism

All Contractors including Plumbing and Mechanical Contractors get a lot more attention from  local, state and Federal tax agencies then they think they deserve because your nature is to spend most of your time standing up, moving around, building, remodeling, repairing, maintaining stuff that makes civilization possible; and not enough time and energy on your construction bookkeeping.

Construction Accounting And Bookkeeping involves a massive amount of studying, intense reading, some boring work, a bit of routine, mundane work and a whole ton of mind numbing continuing education classes and seminars. It’s a little bit like flying an airplane, 98% boredom with 2% sheer terror!

So most contractors tend to put off their bookkeeping chores for as long as they can or when the pressure mounts high enough they get themselves a cheap bookkeeper and both options end badly with much pain and lots of tears.

Most accountants are aware the IRS can ask for an EXACT COPY of your QuickBooks file. And most of us know the IRS has been busy training some of their staff on how QuickBooks works so they are more skilled in getting contractors like you to pay your fair share of taxes. All I can say is “Give to Caesar what belongs to Caesar”.

Compliance with the laws, rules and regulations makes sense and then focus your time and effort earning money doing what you do best; operating your construction company at a profit.

Spending time on things you are not good at or even worse hiring a cheap bookkeeper is letting  a Nickel hold up a Five Dollar Bill! It makes no sense to try to save Nickels when you can be earning Five Dollar Bills.

During the times when construction jobs are scarce that is the best time to work on your Business Strategy which is like packing away Hundred Dollar Bills because you are the only one who can do that particular work! If you would like some insights on how to do develop a Business Strategy click here.

Next outsource  everything that does not directly impact your customers and clients to companies whose core competency is doing those things because they can normally do it better, faster and cheaper than you can which can save you time and money.

Reallocate the time and energy from the tasks you outsource to new innovations that add real value to your prime customers and clients and watch your construction company grow and prosper.

IRS Audits are a fact of life; do your best to have a clean set of QuickBooks, set aside money in a separate bank account, pay all of your taxes on time, do what you know is right sleep good.

We serve Plumbing and Mechanical Contractors and other Contractors all across the U.S.A. including Alaska and Hawaii with cloud based contractor bookkeeping services needs so I encourage you to consider hiring us for your Construction Accounting and Bookkeeping and focus on what you do best. With 24/7 remote access to your desktop version of QuickBooks and a scanner in your office no bookkeeper needs to come to your office.

If you are having tax issues, behind on tax payments or have unfiled local, state or Federal tax returns contact us and we will do our best to help you. Please be advised we play the tax game on the straight and narrow. And we have found ALL TAX AGENCIES will work out some kind of payment plan as long as your intent is to get on the straight and narrow.

We also handle emergency bookkeeping and accounting issues

Profitable Construction Company owners have known about the value of outsourced contractors bookkeeping services for a very long time and now you know about it too!

Thinking About Outsourcing Your Contractors Bookkeeping Services?

Click Here To Download A Free Guide

We Are QuickBooks Experts Specializing In Construction Bookkeeping Services

About The Author:

Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington, www.FastEasyAccounting.Com  He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Plumbing Contractor, General Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Accounting Specialist, Bill.Com Guru and Tsheets ProAdvisor. Follow Randal on Google+

I leave you with this heartfelt blessing – “As a contractor you absolutely, positively deserve to be wealthy because you add value to other people’s lives and never let anyone tell you otherwise. We’re all in this together and I believe in you.”

Warm Regards,

Randal L. DeHart, PMP, QPA


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