You think you have your bases covered for the next audit. But chances are your boss doesn’t have the same faith in you. That’s the learning from a recent survey by Deloitte. The company asked executives to rate their organizations based on how ready they are for audits or other “regulatory investigations.” Only 20% said they thought their troops were “very ready.”

Worse news for Accounting pros: 24% of execs said their companies are at a much greater risk for such an investigation than they were just a year ago. Given the economic climate — and people’s feelings about it — it seems certain that some companies are bound to get more scrutiny in the near future. And coming up short of good answers could lead to not only financial or legal action — it could leave your company with the proverbial egg on its  face.

How to get ready

One bright spot from the survey: 60% of company execs agreed that self-reporting results of internal audits could help identify problems while they’re still fixable and/or mitigate the damage from other investigations.

If you don’t already have self-audits scheduled, now’s the time to get the ball rolling. Even if you’re already sure your procedures and books are as tight as a drum, a successful self-audit can give you two other important benefits:

• proving to upper management that you are ready for the “real” audit, and
• finding errors, cash-drains and other ways to potentially save money down the road.

Tell us: Do you think your company’s ready for an audit or investigation? Is upper management’s skepticism warranted? Sound off in the comments.

IRS has warned its going to start doing random employment tax audits in 2010. It’s aim: To find out exactly how much tax revenue the feds are losing due to employees being misclassified as independent contractors (ICs).

IC classification has always been a gray area — which is why many companies have relied on making an educated guess and then knocking on wood. Without any other red flags, many potentially misclassified employees (and their employers) have flown under the radar.

Random audits could be done at any company — there’s no way to minimize your risk of getting flagged.

What you can do: Go through your hiring procedures now and review the work done by ICs. The first random audits won’t be done until around April 2010, so there’s still time to address any questionable classifications you have on your books.

It’s easier to catch T&E swindlers if you know why — and how — they do what they do. A recent survey by T&E Magazine got the real scoop from people who freely admit to having fudged their travel expenses in one way or another. Some of the findings may surprise you.

For starters, employees appear to be getting more honest. 83% said they were always totally honest on their expense reports. That’s up from just 70% in 2004.

Of those who admit to cheating, the amount they wrongfully claimed is down: 8% said they padded their expenses $100 or more — that figure was 34% in 2004. Another 32% said they padded expenses by $50 to $99.

Most travelers who admitted to cheating (66%) said they did so because being on the road cost them in ways that don’t fit on any expense report category. Another 30% said they routinely have to use personal money for business costs when traveling. Padding is their way of “righting” the books.

And 26% say taking a little extra cash is their way of being compensated for the hassles of being on the road. Only 4% said they cheat because they can. [Note: Respondents could pick more than one reason.]

While no one wants to have cheaters in their office, those “reasons” for padding expenses give you a good opportunity to make sure you don’t see any of it in the future. It indicates that people are less likely to inflate their expenses if they feel the company appreciates the hassles — and out-of-pocket expenses — of being on the road.

It’s a good reminder to periodically review your company’s T&E policies and guidelines. Making sure they’re still fair to your road warriors could end up saving you time and money, as well as improving employee morale.

What do you think: Do most traveling employees pad their expenses to right a perceived wrong? Or is that simply an attempt to justify stealing from the company?

And what’s the most egregious attempt at expense report padding you’ve seen? Share your stories in the comments.

Tax compliance has never been easy — and mistakes are always costly. But it seems the situation is about to get a lot worse. Transaction taxes — sales and use taxes, VAT, etc. — are all expected to see more enforcement and stepped up penalties in the next year or two.

The reason is simple: States need more funds, and lawmakers don’t want to hike the rates of voters who are already feeling pinched.

In fact, the signs are so ominous, 88% of companies said they expect to see more audits in the near future. That’s according to recent research from Sabrix.

What it means for Accounting

With more audits — and auditors who are less likely than ever to cut you some slack — even a small compliance error can snowball into big fines.

Take some time now to review your books and procedures. If there are any errors lurking in your books, you’ll want to find and fix them now — before auditors show up at the door.

Another good idea: Have a refresher meeting (or at least a memo) to remind other key department heads about the importance of getting Accounting the information you need.

Other departments don’t always realize the tax implications of, say, moving a piece of equipment from one facility to another. It’s vital they understand that you’re asking for transaction details not just because “it’s procedure,” but because  it can have serious consequences to your company’s tax compliance.

In fact, the audit rate for small companies actually went up a bit, from 0.92% in ’07 to 0.95% in ’08.

It won’t last

Unfortunately, the trend toward fewer audits isn’t likely to continue. IRS said the reason for the drop was that it had to reassign agents from audits to handle the influx of questions regarding the 2008 tax rebate program.

With that program all but over, the agents are expected to go back to their old tasks — auditing companies like yours.

It’s a problem because a card statement may not give you all the detail you need to confirm what portion of the transaction is taxable, what sales tax rate applies, or even whether or not the vendor already collected the tax.

That leaves Accounting trying to do a lot of detective work come year-end.

To minimize the hassle to you, talk to upper management about implementing one of these three steps to improve compliance — and eliminate some of your headaches:

1. Have your card issuer limit where and how cards can be used. Some of the criteria you can use are vendors in certain geographic locations, vendors that you know are required to collect tax, etc. This is the easiest option for Accounting, but purchasers may gripe about having limits placed on how they can do business.
2. Allow cards to be used at all vendors — but make purchasers responsible for confirming that applicable sales tax is included in the final charge. This is a good option if you trust purchasers to have the experience — and the time — to actually do all the follow-up.
3. If you can’t limit where/how cards are used, you need to have a procedure in place to check that there are no lingering sales tax liabilities on your books. Going line by line through each transaction is the safest, most thorough way to do so — but it takes a lot of time you probably don’t have. Alternative: You can probably use mini-audits or sampling techniques (where you base your total sales tax liability on a random percentage of transactions.) Just make sure you check with your state department of revenue to ensure the method you choose passes muster with their requirements.

IRS is auditing more than 800 nonprofits that appear to have failed to report income they received from “casino nights” and similar events. The events are generally used as fundraisers for the groups.

The Service believes many of the groups owe tax on unrelated business income and/or payroll taxes generated during the events.

Too soon to say how much missed revenue the audits could turn up, but if it’s significant, expect IRS to roll the audit program out on a larger scale — especially as other sources of tax revenue are drying up.

The questionnaires went to a cross-section of schools: public and private four-year schools of all sizes.

IRS said it will use the information to identify areas that “need more outreach and education or further scrutiny,” according to a IRS Commissioner Doug Shulman.

IRS’ report on the information will come out sometime in ’09.

The guidance comes to us via the Internal Revenue Manual, 4.10.21. The manual shows you how IRS is training its auditors — and therefore what you should be looking for when examining your own controls and procedures.

One of the areas of focus of the just-updated manual is that it encourages examiners to look more closely at non-financial companies. (Historically, most enforcement efforts were focused on the financial sector.) IRS is particularly interested in companies that provide “professional services”: medical, legal, accounting, entertainment, software & technology, real estate, etc.

The latest in IRS’ war against tax-avoiding tool reimbursement plans means more work for you — and more money out of your company’s pocket. As you know, IRS has been taking a careful second look at tool and equipment reimbursement plans under its new enforcement program. And so far, IRS says every one it’s looked at has failed the “accountable plan” test. As a result, it expects those payments to be included in employees’ income — and to have appropriate employment taxes withheld from the amounts reimbursed.

For all the details, see IRS’ latest coordinated issue paper on the topic. 

Most of the plans are failing the accountability test for one of two reasons either they:

1. risk reimbursing more than the employees actually spend on tools, or
2. don’t require employees to substantiate either the actual cost, or the business purpose for the tools.

For more info, check out the companies most likely to be targeted for an audit and the steps IRS requires your company to take to stay in compliance.