If you`re in a high-income, unincorporated practice, doctor, the answer comes as bad news.
Ron Combs, Associate Editor
Sorry, doctor, but if you`re in a high-income, unincorporated practice, you will face an audit risk that is roughly five times greater than your incorporated counterparts in 1996. "It comes as part of an IRS effort to assure tax compliance," explains John McGill, tax attorney and CPA with Blair/McGill & Company, a firm specializing in financial consulting for the dental profession.
"The number of health-care professionals selected for a tax audit will increase dramatically next year," continues McGill. "The IRS has found that the greatest level of tax non-compliance is among sole proprietors (unincorporated businesses) where, on average, only 75 percent of actual income is reported," explains McGill. He adds that sole proprietors are selected for IRS audit based upon their reported gross collections while corporate tax returns are selected for audit based upon the tax value of assets by the corporation, which is unusually minimal.
Doctors also should be aware of the new audit methodology being employed by the IRS. "The IRS now is heavily questioning doctors about their sources of income and assets in an attempt to uncover additional taxable income," says McGill. "Even if the IRS does not suspect tax fraud when auditing a doctor, these intrusive, personal interrogations have been initiated at a considerable cost in terms of time and expense to the doctor."
There is a bit of good news, though. The IRS has temporarily postponed the return of the dreaded Taxpayer Compliance Measurement Program (TCMP) audits. Comments McGill: "These encounters, dubbed `audits from hell` by doctors, require verification of each and every entry on the tax return. These audits are conducted to determine the level of tax compliance among doctors across the country and to identify areas of non-compliance that exist in order to modify future tax procedures." For free additional information on audits, send a self-addressed, stamped ($.52) business envelope to Blair/McGill & Co., Inc., 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217 and request "How to Avoid an IRS Audit."
Major Tax Changes Coming
As we go to press, the House and Senate are working on tax and budget measures and attempting to reconcile their differences. McGill says that there are provisions common to each plan that certainly will be enacted.
McGill points out that Congress seems intent on expanding contributions to IRAs. "Legislation probably will take the form of allowing more doctors to contribute and deduct IRA contributions than in the past. Another IRA option being considered would allow tax-free withdrawals from non-deductible IRA accounts."
McGill predicts that a child tax credit, providing each family with a dollar for dollar reduction in tax liability equal to $500 per child, will be enacted. He also predicts that this benefit will be phased out for higher-income doctors.
Tax System Changes?
With the 1996 presidential- election campaign in full swing, expect to be inundated with proposals for a new tax system, McGill notes. However, he feels that a dramatic change to a consumption-based tax system, similar to a sales tax, is unlikely. "Moving to a simpler system through a flat tax is a more likely, though still a longshot," he says. "While the concept is appealing, many doctors do not realize that some flat-tax proposals would broaden the tax base by subjecting currently tax-free fringe benefits such a medical insurance, disability insurance, and retirement plan contributions to current income tax."
Clip Your Tax Calendar
Filing tax deposits, payroll taxes and estimated payments in a timely manner remains pretty much a day-to-day challenge for doctors. But, as in the past, it will be a challenge easier met by clipping and keeping close at hand the 1996 Dental Economics` Tax Calendar that follows.