PEMBROKE, Mass. — Tax preparation is upon us once again. It is an annual ritual where we bring our figures to our accountant and the information is assembled. The finished forms are handed to you and you write out checks to the federal and state tax authorities.
It has come to my attention that not all Laundromat operators are honest with their figures. I will argue, both from personal and societal positions, that being dishonest where taxes are concerned is wrong. It doesn’t help a store owner or their business in the long run. And it is not good for them personally.
Why should a business file its true taxes? First and foremost, it is fraud to understate income. When you understate income, you reduce profit, and pay less taxes than your business should. Fraud is an offense punishable by jail time and heavy fines.
Unless you admit guilt, there must be a trial. You must appear in court and hire a lawyer. The judge rules the outcome. Time drags on.
You will find yourself overwhelmed, trying to run the business and handle the legal case at the same time. Expense errors are generally less serious.
What are the odds of being audited? It happens, believe me. Over the course of 30 years, you probably have a 50-50 chance of being audited. Moreover, if you cheat, that increases the chances.
The Internal Revenue Service (IRS) decides who it will audit by several different criteria. One method is simply random selection, but other criteria include changes from last year, divergent figures from industry standards, and a high audit score.
The IRS has a formula involving calculations that include low gross profit margin, high auto expense, high travel and entertainment, and little (or zero) profit to determine probable cheating. These are the audit triggers.
I’ve heard of a few business owners who were ruined by their audits. One Laundromat operator was so hounded by the IRS after it was discovered that he underreported his income that he closed up. Another business owner reported minimal profit for many years, so the IRS redid his books and assessed him $125,000. When he wouldn’t or couldn’t pay that assessment, the agency began garnishing his wages. At that point, the poor fellow took his own life, and his wife left the country so her wages wouldn’t be garnished.
Second, the collected figures provide valuable information. They are used to pay taxes, yes, but they are also used to produce information. They constitute your monthly profit and loss (P&L), your specific reports, and your ratios. If you don’t use correct figures, the information will be corrupted.
Not only the altered figures but all your figures become less than reliable. You will ultimately rely less on the information in front of you and more on gut, and that is where you will begin to make mistakes.
To use an example, if you pocket some cash volume every day, you will lose track of the proper pricing ratio upon which you are operating. Your price-cost ratio will be incorrect. Your expense margins will be off. No one can make good decisions with skewed information.
You will lose focus and then your business becomes a vehicle for taking cash, not a legitimate enterprise.
You begin to look for other ways to cheat, rather than focus on the business. Instead of a going concern, it becomes a conduit for obtaining money.
Check back Wednesday for the conclusion!
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].