Only Certified Public Accountants (CPA’s) can prepare audited financial statements on behalf of a business or non-profit organization. In order for a non-certified accountant to become a CPA, the accountant needs to work for an accounting firm for a few years, acquire five hundred hours of auditing time, and pass a test from the American Institute of Certified Public Accountants as well as from their state. A CPA also must take 120 hours of continuing education courses every three years to maintain their license.

The purpose of the Public Company Accounting Oversight Board is to oversee auditors, (accounting firms, CPA’s, accountants) of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audited financial statements. The PCAOB’s goal is to improve the quality of audited financial statements, reduce the risk of auditing failures, and increase public trust in financial reporting processes and of the auditing profession. The PCAOB has established auditing, quality control, ethics, and independence standards to be used by registered public accounting firms and CPA’s in the preparation of audited financial statements for publicly traded companies, as required by the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission (SEC).

The Sarbanes-Oxley Act of 2002 requires the PCAOB to: register all accounting firms, CPA’s, and accountants that audit public companies; inspect all registered firms and CPA’s annually for those who annually audit over 100 public companies and a minimum of once every three years for those that audit under 100, assess the degree to which the firms and CPA’s comply with the act, the rules of the PCAOB and the SEC, professional standards in connection with the performance and issuance of audited financial statements and attest services; related matters involving public companies, and investigate and discipline any firms and CPA’s whom are in violation of specific laws or standards. All firms and CPA’s are still required to have peer review of their auditing and accounting practice in order to satisfy the American Institute of Certified Public Accountants (AICPA) membership, federal regulatory (Generally Accepted Auditing Standards) and/or state licensing requirements. There are currently over 2,000 public firms registered with the PCAOB, with more pending registration. A list of current and pending registered firms can be found on the PCAOB website.

The PCAOB currently has pending a requirement that all registered firms and CPA’s submit an annual report on Form 2, provided on the PCAOB website, by June 30th, except for those firms and CPA’s that have been registered between April 1st and June 30th of that year. Also they will be required to pay an annual fee to the PCAOB by July 31st. As these requirements are still pending approval, the annual report and fees are not required for the 2009 calendar year deadlines. In these reports the registered CPA’s must provide various information for the year including: audited financial statement reports issued during the year; disciplinary history of any accountants that joined the firm during the year; a break down of the fees for services provided to all clients during the year, showing the percentage of the fees billed to public audit clients for audit services, other accounting services, tax services, and non-audit services. The PCAOB also requires registered CPA’s to submit special reports on Form 3 within 30 days of the occurrence of the special event. Such special events include change of name or contact information, withdrawal of an audited financial statement by an auditor if the client did not report withdrawal in the 8-K filing with the SEC, and if legal, administrative, or disciplinary action have been taken again the firm or its related accountants. These reports, along with reports from the PCAOB on its inspections of public company audits will be available to the public on their website.

It is the responsibility of the registered CPA’s that audit financial statements for public companies to provide accurate and independent reports. By following the rules and regulations of the PCAOB, AICPA, and GAAP, registered CPA’s can provide the highest quality of audited financial statements that fairly and accurately represent the public company, detect material misstatements and false or missing information caused by fraud, and protect the interest of investors.

About the Author:

Neil Rischall is the CPA behind the CPABookkeepers site which has a wealth of information about audited financial statements as well as all services provided by a Certified Public Accountant.

Only Certified Public Accountants (CPA’s) can prepare audited financial statements on behalf of a business or non-profit organization. In order for a non-certified accountant to become a CPA, the accountant needs to work for an accounting firm for a few years, acquire five hundred hours of auditing time, and pass a test from the American Institute of Certified Public Accountants as well as from their state. A CPA also must take 120 hours of continuing education courses every three years to maintain their license.

The purpose of the Public Company Accounting Oversight Board is to oversee auditors, (accounting firms, Certified Public Accountants (CPA’s), accountants) of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audited financial statements. The PCAOB’s goal is to improve the quality of audited financial statements, reduce the risk of auditing failures, and increase public trust in financial reporting processes and of the auditing profession. The PCAOB has established auditing, quality control, ethics, and independence standards to be used by registered public accounting firms in the preparation of audited financial statements for publicly traded companies, as required by the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission .

The Sarbanes-Oxley Act of 2002 requires the PCAOB to: register all CPA firms that audit public companies; inspect registered CPA firms annually for those who annually audit over 100 public companies and a minimum of once every three years for those that audit under 100, assess the degree to which the CPA firms comply with the act, the rules of the PCAOB and the SEC, professional standards in connection with the performance and issuance of audited financial statements and attest services; related matters involving public companies, and investigate and discipline any accounting firms and related accountants who are in violation of specific laws or standards. All CPA firms are still required to have peer review of their auditing and accounting practice in order to satisfy the American Institute of Certified Public Accountants (AICPA) membership, federal regulatory (Generally Accepted Auditing Standards) and/or state licensing requirements.

The PCAOB currently has pending a requirement that all registered CPA firms submit an annual report on Form 2, provided on the PCAOB website, by June 30th, except for those firms that have been registered between April 1st and June 30th of that year. Also they will be required to pay an annual fee to the PCAOB by July 31st. As these requirements are still pending approval, the annual report and fees are not required for the 2009 calendar year deadlines. In these reports the registered CPA firms must provide various information for the year including: audited financial statement reports issued during the year; disciplinary history of any accountants that joined the firm during the year; a break down of the fees for services provided to all clients during the year, showing the percentage of the fees billed to public audit clients for audit services, other accounting services, tax services, and non-audit services. The PCAOB also requires registered CPA firms to submit special reports on Form 3 within 30 days of the occurrence of the special event. Such special events include change of name or contact information, withdrawal of an audited financial statement by an auditor if the client did not report withdrawal in the 8-K filing with the SEC, and if legal, administrative, or disciplinary action have been taken again the firm or its related accountants. These reports, along with reports from the PCAOB on its inspections of public company audits will be available to the public on their website.

It is the responsibility of the registered CPA firms that audit financial statements for public companies to provide accurate and independent reports. By following the rules and regulations of the PCAOB, AICPA, and GAAP, registered CPA firms can provide the highest quality of audited financial statements that fairly and accurately represent the public company, detect material misstatements and false or missing information caused by fraud, and protect the interest of investors.

About the Author:

Neil Rischall is the CPA behind the CPABookkeepers site which has a wealth of information about audited financial statements as well as all services provided by a Certified Public Accountant.

Only Certified Public Accountants (CPA’s) can prepare audited financial statements on behalf of a business or non-profit organization. In order for a non-certified accountant to become a CPA, the accountant needs to work for an accounting firm for a few years, acquire five hundred hours of auditing time, and pass a test from the American Institute of Certified Public Accountants as well as from their state. A CPA also must take 120 hours of continuing education courses every three years to maintain their license.

The purpose of the Public Company Accounting Oversight Board is to oversee auditors, (accounting firms, Certified Public Accountants (CPA’s), accountants) of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audited financial statements. The PCAOB’s goal is to improve the quality of audited financial statements, reduce the risk of auditing failures, and increase public trust in financial reporting processes and of the auditing profession. The PCAOB has established auditing, quality control, ethics, and independence standards to be used by registered public accounting firms in the preparation of audited financial statements for publicly traded companies, as required by the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission (SEC).

The Sarbanes-Oxley Act of 2002 requires the PCAOB to: register all accounting firms that audit public companies; inspect registered accounting firms and their associated certified public accountants annually for those who annually audit over 100 public companies and a minimum of once every three years for those that audit under 100, assess the degree to which the firms comply with the act, the rules of the PCAOB and the SEC, professional standards in connection with the performance and issuance of audited financial statements and attest services; related matters involving public companies, and investigate and discipline any accounting firms and related accountants who are in violation of specific laws or standards. All firms are still required to have peer review of their auditing and accounting practice in order to satisfy the American Institute of Certified Public Accountants (AICPA) membership, federal regulatory (Generally Accepted Auditing Standards) and/or state licensing requirements.

The PCAOB currently has pending a requirement that all registered firms submit an annual report on Form 2, provided on the PCAOB website, by June 30th, except for those firms that have been registered between April 1st and June 30th of that year. Also they will be required to pay an annual fee to the PCAOB by July 31st. As these requirements are still pending approval, the annual report and fees are not required for the 2009 calendar year deadlines. In these reports the registered firms must provide various information for the year including: audited financial statement reports issued during the year; disciplinary history of any accountants that joined the firm during the year; a break down of the fees for services provided to all clients during the year, showing the percentage of the fees billed to public audit clients for audit services, other accounting services, tax services, and non-audit services. The PCAOB also requires registered firms to submit special reports on Form 3 within 30 days of the occurrence of the special event. Such special events include change of name or contact information, withdrawal of an audited financial statement by an auditor if the client did not report withdrawal in the 8-K filing with the SEC, and if legal, administrative, or disciplinary action have been taken again the firm or its related accountants. These reports, along with reports from the PCAOB on its inspections of public company audits will be available to the public on their website.

It is the responsibility of the registered accounting firms that audit financial statements for public companies to provide accurate and independent reports. By following the rules and regulations of the PCAOB, AICPA, and GAAP, registered firms can provide the highest quality of audited financial statements that fairly and accurately represent the public company, detect material misstatements and false or missing information caused by fraud, and protect the interest of investors.

About the Author:

Neil Rischall is the CPA behind the CPABookkeepers site which has a wealth of information about audited financial statements as well as all services provided by a Certified Public Accountant.

FINANCIAL: The CPA, Certified Public Accountant, is a state-issued license that is well known and respected by judges and juries. Currently, the CPA license requires a five-year college degree, passing what is perceived as one of the most difficult of professional exams plus two years of supervised experience. CPAs are governed by the holder’s state board of accountancy3 and the AICPA, American Institute of Certified Public Accountants4. CPAs must obtain forty hours of continuing professional education per year and must adhere to a strict code of ethics. CFAs, or Chartered Financial Analysts, 5 are focused on investment analysis and valuation. The designation requires an intensive educational course, passing a rigorous exam and three years of experience, but requires no continuing education. The CFP, Certified Financial Planner6, is oriented towards personal financial planning, requires passing a comprehensive exam and completion of thirty hours of continuing education every two years. CFAs and CFPs, along with CPAs, must adhere to strict ethical and competency guidelines. The CDFA, Certified Divorce Financial Analyst7 is a credential which requires passing an online exam.

BUSINESS VALUATION: Valuation credentials have become more prevalent in the last fifteen years and are essential if one is attempting to qualify as an expert witness. The ABV, Accredited in Business Valuation8, and CVA, Certified Valuation Analyst9 are issued by the AICPA and National Association of Certified Valuation Analysts, respectively. The CVA requires an intensive valuation course or holding of another valuation credential and passing a rigorous exam. The ABV requires a similar exam and valuation experience. Both credentials require the holding of a valid CPA license, therefore the ethical and continuing education requirements apply. The American Society of Appraisers issues the ASA, Accredited Senior Appraiser10, which requires a college degree, passing a comprehensive exam, five years of experience and obtaining forty hours of continuing education very five years. ASAs are usually not CPAs therefore they generally have less of a background in accounting and tax issues.

FORENSICS: A relatively new but rapidly expanding designation is the CFF, Certified in Financial Forensics11, which is issued by the AICPA. The CFF requires holding a valid CPA license, a minimum of one thousand hours of work experience and seventy-five hours of education in forensic-related disciplines. Since the CPA is required, the ethical and continuing education requirements apply. Almost all serious fraud investigators hold the CFE, Certified Fraud Examiner12. The CFE is issued by the Association of Certified Fraud Examiners and requires a bachelor’s degree, two years of experience, passing a comprehensive exam and completing twenty hours of continuing education per year.

REAL ESTATE: Commercial litigation and divorce often require a real estate appraisal. Two very respected appraisal credentials are the MAI and SRA, both of which are issued by The Appraisal Institute13. The SRA is more residential-oriented. The two credentials are not acronyms like the others described in this article. Current requirements for the MAI and SRA include completing rigorous education requirements, submitting specialized experience descriptions and receiving credit for a demonstration appraisal report. The MAI additionally requires passing a comprehensive exam. Holders of both designations must adhere to a strict code of ethics and are subject to a peer review process.

In the litigation context, how does one score the relevance of a set of letters? In addition to the education, years of experience and testing required to obtain a credential, the question of relevance is answered by the professional standards, ethics and continuing educational requirements of the credentialing organization. The most respected organizations require continuing education in their specific discipline and have procedures in place for public complaints and disciplinary proceedings that can subject an expert to legal and monetary consequences by way of suspending a credential. Most of the above-described organizations have disciplinary mechanisms in place, but all of the credentials requiring the CPA license as a prerequisite have the full force and effect of state statutes enforced by a government agency, each state’s board of accountancy.

The “alphabet soup” of credentials can be a jumble, but these letters can help the litigants and judges separate the wheat from the chaff. A practitioner attempting to qualify in court as an expert should hold a recognizable and respected credential if one exists in that niche. The CPA is essential for all things financial since judges recognize and respect the license. The CFA and CFP are essential designations in investment-related matters and both boost the expert’s credibility in divorces due to the personal nature of the finances involved. The CFF represents longevity and a commitment to forensic accounting and litigation support and the CFE represents intensive training for fraud-related engagements. A business valuation expert must have a CVA, ABV or ASA in order to demonstrate competency in this niche and a real estate appraiser’s credibility is boosted greatly if he/she has earned the MAI and/or SRA.

by Robert Vance, CPA/ABV/CFF, CVA, CFP

Visit the Valuation Services Web page
Lattimore Black Morgan & Cain, PC
615-377-4600

1Black’s Law Dictionary defines “forensic” as belonging to courts of justice.
2Other very credible credentials that are less widely held exist, but were not included due to space limitations.
3www.state.tn.us/commerce/boards/tnsba/
4www.aicpa.org
5www.cfainstitute.org
6www.cfp.net
7www.institutedfa.com
8http://fvs.aicpa.org/
9www.nacva.com
10 www.appraisers.org
11http://fvs.aicpa.org/
12www.acfe.org
13www.appraisalinstitute.org

About the Author:

Robert Vance, CPA/ABV/CFF, CVA, CFP, concentrates his practice on business valuation, divorce litigation support, economic damage calculations, civil mediation, forensic accounting and expert witness testimony. He practiced in public accounting for eighteen years before devoting full time to these disciplines in 2003.

There are many types of accounting that all have different roles in the business world. Probably the best-known and most ‘classic’ type of accountant is a CPA, or Certified Public Accountant. A CPA has a very diverse client list. They can serve anyone including individuals, private firms, large publicly traded corporations, the government, or non-profit organizations. They can perform the role of an independent auditor, tax advisor, or financial consultant.

When performing an audit, a CPA will produce an independent auditor’s report that will tell the client four key pieces of information. First it identifies the documents that were audited and describes that the purpose of this report is to express an opinion about the documents in questions. Next it explains the standards used to analyze the data. Third is the actual opinion of the auditor in regards to the financial documents reviewed. Finally, the auditor elaborates on his opinion regarding the effectiveness of the financial reporting of the firm.

Another type of accountant is a CMA, or Certified Management Accountant. A CMA serves a smaller customer base, because they typically work for a single firm. The major role is to advise the company on their financial management, accounting processes, and budgetary issues. A CMA may work with individual employees of that company, but their main function is to advise the executives on the company’s complete financial structure. They are often involved in major decisions for the company.

A subset of managerial accounting is cost accounting. A cost accountant works closely with the budget structure of a company. They are typically involved with determining the internal costs of many functions and the profitability of the routine company operations. Cost accountants have a very future-oriented job in that they are primarily concerned with using historical data to forecast what the prospective financial strength of the company will be.

A third major type of accounting is a financial accounting. Financial accountants are primarily responsible for the preparations of the financial documents for review by the corporate decision makers. Managerial accountants, cost accountants, top management, and shareholders use these documents to make major business decisions. Financial accountants assemble an annual report including balance sheets, income statement, statement of cash flows, and statement of change in owners’ equity (or retained earnings). These documents are usually targeted to an external audience.

Financial statements are vital to the success of any profitable business. Their purpose is to formally record all financial activities of the company or individual. These statements summarize in a standard format the financial status of the company in both the short term and the long term. There are four main types of financial statements.

First, the balance sheet summarizes the company’s total assets, liabilities and owners’ equity at a given point in time. This report is also known as the statement of financial position. The balance sheet is used at the beginning of year as a starting point. At the end of the year a new balance sheet will conclude the fiscal cycle. The other financial statements that will be discussed are used to fill in the gap, because a lot can happen in a year.

The income statement summarizes the revenue and expenses for the year and highlights if the company operated at a profit or at a loss. It is in this report that the total gross income is defined as well as all of the expenses that were incurred along the way. The top line of the statement is net sales and the bottom line is net income.

The statement of change in owners’ equity, or statement of change in retained earnings also analyzes data over a time period. Typically this is over a fiscal year. The two major components of owners’ equity are paid-in capital, or cash investments, and retained earnings, or the net income less dividends. If retained earnings are negative because dividends have exceeded net income, this is considered a deficit.

The final major financial statement commonly used by shareholders is the statement of cash flows. The purpose of this report is to follow the company’s cash activities during the year. This is mainly concerned with cash transactions pertaining to operating, investing, and other financial activities.

Shareholders use the four major financial statements to make investment decisions and to see what the company is doing with their money. Executives and top management use statements to make internal budgetary decisions and forecast out for the future success of the business. There are many components that go into the financial reporting for a company, and all information is vital to its continued financial health.

About the Author:

Financial statements provide information from an organization’s accounting documents about their economic resources and obligations on a specific date, as well as their financial activities over a period of time. Financial statements are usually prepared in accordance with Generally Accepted Accounting Principles (GAAP), which are the standards issued by the American Institute of Certified Public Accountants (AICPA), but they may also be prepared on other comprehensive basis of accounting, such as cash basis or tax basis, depending on the needs of the users of the financial statements.

The lowest level of assurance in regards to financial statements is compiled financial statements. One of the main reasons these are used in lieu of other financial statement presentations is for the timely release of financial information about an organization. Compiled financial statements are presentation of various financial reports and documentation, which is the representation of management or owners of an organization. Compilation standards allow the organization to omit note disclosures as long as there is no intent to mislead the users. This is the only type of financial statement that allows omitted disclosures.

An accountant will compile the information supplied by the client into a proper financial statement presentation. This is the only financial statement presentation that a non-certified accountant can prepare. The accountant will read the financial statements and issue a report. If the organization has elected to omit any disclosures, this must be included in the accountant’s report of the financial statements, as well as if the disclosures had been included; they might have influenced the user’s conclusions.

The accountant preparing the compiled financial statements are not required to verify or confirm the records and do not need to analyze the statements for accuracy. However, an accountant engaged to compile financial statements is required to obtain a general understanding of the organization’s business transactions, its accounting records, qualifications of their accounting personnel, the accounting basis on which the financial statements are presented, and the form and content of the financial statements. If any obvious material misstatements or missing information is noted, the accountant must discuss these items with the organization’s management for clarification or adjustment to the statements, or withdraw from the engagement if management refuses to provide additional or revised information.

In compiled financial statements, the organization, not the accountant, is responsible for the accuracy and completeness of the financial statements. Since the statements were not audited or reviewed, they are not certified by a Certified Public Accountant (CPA). No opinion or assurance is expressed in the report as to whether the financial statements are free of material misstatements or false/missing information or if they are found to be accurate, complete and fairly presented to meet the requirements of the US GAAP (Generally Accepted Accounting Principles).

About the Author:

Neil Rischall is the CPA behind the CPABookkeepers site which has a wealth of information about compiled financial statements as well as all services provided by a Certified Public Accountant.

Financial statements provide information from an organization’s accounting documents about their economic resources and obligations on a specific date, as well as their financial activities over a period of time. Financial statements are usually prepared in accordance with Generally Accepted Accounting Principles (GAAP), which are the standards issued by the American Institute of Certified Public Accountants (AICPA), but they may also be prepared on other comprehensive basis of accounting, such as cash basis or tax basis, depending on the needs of the users of the financial statements.

The middle level of assurance in regards to financial statements is reviewed financial statements. A Certified Public Accountant (CPA) must obtain a reasonable basis for expressing limited assurance that the financial statements meet the requirements of the US GAAP are free of material misstatements or false/missing information.

To perform the review, the CPA must obtain a general understanding of: the organization’s industry as well as information about their operations, products, and services, their accounting records, qualifications of their accounting personnel, the accounting basis on which the financial statements are presented, and the form and content of the financial statements. The auditor then reviews the information supplied by the client and makes specific inquiries relating to accounting policies, record keeping and accounting practices, actions of the Board of Directors, and changes in business activities. The specific inquiries required to perform a review should address the following areas: related party transactions; accounting policies, problems, and areas of greater risk; uncertainties, contingent, current and long-term liabilities and assets; qualifications of accounting personnel and division of accounting duties; inventory; any departures from GAAP; revenues, expenses, accounts receivable, cash and equity accounts, and investments; and property, plant, and equipment assets and liabilities.

The auditor then applies various analytical procedures to identify unusual items or trends in the financial statements that may need explanation. If any material errors or misstatements are noted, the CPA will discuss these items with the organization’s management for clarification or adjustments to the financial statements.

Upon completion of a review, the CPA will issue a report that provides limited assurance that the financial statements are free of material misstatements or false/missing information and are found to be accurate, complete and fairly presented to meet the requirements of the US GAAP. Since the financial statements were reviewed and not audited, no opinion about their nature is expressed. The report also notes that the financial statements are a representation of management. Reviewed financial statements can also be done on Other Comprehensive Basis of Accounting (OCBOA), such as a tax or cash basis, as long as the basis used is documented in the report.

About the Author:

Neil Rischall is the CPA behind the CPABookkeepers site which has a wealth of information about audited financial statements as well as all services provided by a Certified Public Accountant.

1. FOCUS ON YOUR CORE BUSINESS

The single best way to better manage any firm is to focus on the business at hand and on your customers. You are skilled at what you do; that is why you started your business. Typically, as the company grows and the client base increases, owners and managers try to wear too many hats. They become accountant. Network administrator. Office manager. Think back to that first job, the one that inspired you to go out on your own. All your focus was on the client, on your specialized product or service. That inspiration and success is why your business grew. To maximize your potential now, every customer should be treated that way. You cannot do this unless you focus solely on your specialty and leave the accounting, network administration, and office work to other trained professionals.

2. DELEGATE

Delegating non essential jobs will allow you to better manage your time, make you more effective, and increase your profits. You must delegate some responsibilities so that your time can be dedicated to your own area of expertise. The best way to do this is to work with people who are extremely competent at what they do, just as you are at your profession. In many cases it is best to go outside your company to manage details such as payroll, accounting, and bookkeeping. Outsourcing this will save you money.

3. DOWNSIZE AND CUT COSTS

Cutting payroll saves both time and money and also increases your profitability. Frequently, business owners hire full-time office and accounting staff when they really need someone only 10 or 15 hours a week. Why not just outsource this work? You pay for only what you need, when you need it. Downsizing in this way saves money on costly overhead, while it also makes you more effective and your business more profitable. You save valuable time because you do not need to find busy work, train, or supervise staff. Think of how much more time you can devote to your clients!

4. REDUCE TAXES

No one enjoys paying taxes. Nevertheless, many businesses pay too much in sales and income tax because they try to save money by doing something themselves rather than relying on a trained professional. Cutting payroll will cut your tax liability, and turning to a professional to handle your taxes will make your company stronger and more profitable.

5. AVOID COSTLY ACCOUNTING ERRORS

This is really common sense. Whatever your profession, you are not an accountant by trade. Why waste your time – and money – doing something that is beyond your expertise? Even if you are good with numbers, accounting rules and procedures change constantly. There is no way you can manage your company to the best of your capabilities and keep up with all the new accounting trends, just as your accountant is not knowledgeable about the latest trends in your chosen field. One of the best ways to improve your profitability is to find a good accounting firm that specializes in your industry. After all, you should have an accountant who knows what you do, understands the particular challenges of your chosen field, and speaks the language and vocabulary specific to your business. Doing so will save you the most money and cut costly accounting errors.

Identifying and fixing these five problems can help owners of any firm run their company more effectively and efficiently. Finding a competent outsourced accounting solutions provider can dramatically improve overall efficiency and profitability.

About the Author:

Pereira Enterprises, Inc. offers affordable, reliable accounting, consulting, and business management services Keeping YOU in the GREEN! www.pereiraenterprises.com (240) 744-44611

The good news is your chances of an audit are slim.

On average, only about 1% of all individual returns filed during the previous three years (2006, 2007 and 2008) were audited. Roughly 36% of the returns audited were selected because of an earned income tax credit (EITC), a tax credit for certain people who work and have low wages.

Of the 1.36 million individual farm returns with gross receipts from farming in 2008, only 0.5% were audited. In comparison, audit rates for nonfarm business returns (by total gross receipts) were: under $25,000, 1.2%; $25,000 under $100,000, 1.9%; $100,000 under $200,000, 3.8%; and $200,000 or more, 0.6%. Percentages decreased over FY 2007 in each income category.

The IRS maintains a table of average deductions for each income group. When your “score” exceeds this computer-generated average, your likelihood of an audit increases. (As you can see in the statistics above, returns with higher incomes also come under scrutiny more often.)

Although there’s no way of knowing the exact range the IRS uses for your income bracket, there are several ways you can protect yourself.

• Keep everything neat and organized. Make sure you can clearly read your information and be certain to use the correct forms.

• Report all income. Include every W-2 and 1099 form you receive because the IRS automatically gets copies from your employer(s).

• Make sure business expenses and home-office deductions are legitimate. If you’re not sure about a deduction, talk to someone familiar with tax laws – and save your paperwork.

• Clarify anything unusual. Offer explanations and even documentation for any items you believe might raise red flags with the IRS (e.g., drastic changes in income, large losses, extensive charitable contributions, etc.)

• Double-check your return. Confirm your personal information is correct, your numbers are accurate, your forms are signed, and the records on your state and federal returns match.

Of course, your best defense against an audit is honesty. But also keep in mind the IRS selects a certain number of people each year to audit completely at random.

So if you’re still nervous about getting everything right on your return, don’t hesitate to contact an accountant with your questions or concerns.

About the Author:

Ben Koeller is a certified public accountant in Tempe, Arizona. His focus is primarily on preparing and reviewing tax returns for individuals, businesses, trusts and estates, as well as preparing financial statements for business professionals. He works with a wide range of clients, including doctors, attorneys, construction contractors and retailers.

Get Ben’s free tips, insider secrets and latest information on tax breaks and IRS regulations for you and your business at http://www.btkcpa.com.