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Hit 7 figures but losing 5 figures to taxes? Earn a 6-figure income but feel financial chaos? Welcome to the show helping you Simplify Your Numbers.
Most business owners in the $1M–$10M range feel like "passive payers"—surprised by a massive bill every April and wondering why their hard work isn't reflected in their bank account. Host Fabrice Metan, a veteran CFO and tax strategist, cuts through the noise of complex financial data to provide straightforward, actionable insights for the "7-6-5" entrepreneur.
This podcast is the bridge between traditional bookkeeping and high-level advisory. We move you away from a reactive "compliance mindset" and into a proactive strategy where your business becomes your greatest wealth-building tool.
Stop being a passenger in your own financials. It’s time to simplify your numbers, maximize your profit, and hold onto more of what you earn.
Subscribe to join the 7-6-5 community and start your transformation today.
Ep04
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[00:00:00]
Do Income Levels Trigger Audits
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Fabrice Metan: If you talk to enough entrepreneurs, you'll hear these kind of blanket statements very often. But is that actually true? Does making a hundred thousand dollars actually increase your audit risk?
What about 500,000? And what happens once you reach the million dollar mark? Well, the good news is the IRS actually publishes data that can help us answer those questions. So in this episode, we're going to walk through the exact data and the numbers so you can understand exactly what 7, 6, 5 entrepreneurs need to expect as their income grows.
[00:01:00]
Audit Basics and What to Expect
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Fabrice Metan: All right, so let's talk about audits today. That's a very, very scary thing for most entrepreneurs and you know, most taxpayers, and so I just wanted to demystify. What this is about so that you have a better understanding of what could potentially happen based on your income level, based on your type of income.
And from there, try to be as proactive as you can be to protect yourself. And so if you're watching me on YouTube, you're going to notice that I'm looking down at my computer because I need to read you the exact data already. Know that we've been able to pull directly from the [00:02:00] IRS so that, you know, we're looking at the correct information, right?
And so the IRS actually audits less than 1% of returns, believe it or not, in the most recent IRS data. From what I can see, the overall. Audit rate has been roughly 0.2 to 0.5% of returns, meaning that one in about 200 to 500 returns will actually experience an audit.
Now I know even though it's a very scary word. Everyone thinks of an audit. Like you know, you have officers walking into your office and looking through everything. Most audits are actually through correspondence, right? They'll send a notice, they'll tell you what they need. They'll identify a few lines in your tax returns that they have questions about, and all you have to do is essentially show the proof that those items are legit so that you can pass that audit when it comes to an actual in-person audit.
Most of the [00:03:00] time that would be over several items, very large numbers. And, you know, in, in that case it may not be by mail, but it would have to be in person and, and have the opportunity for, for the IRS auditors to actually see what you're dealing with, right. In your activities.
Audit Rates Under 100K
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Fabrice Metan: Now, let's talk about what happens at different income thresholds. So if you are under a hundred thousand dollars based on the IRS data, the estimated audit rate is actually roughly 0.1 to 0.2%. So most taxpayers in that category are going to be your W2 earners. Most of the time the income is already directly reported to the IRS, right?
Your employer would've already sent a copy of your W2 to the IRS before you receive your copy, right? And so, it's very easy for the IRS to kind of, do some checks and balances and making sure that the information they see on the return is exactly what they had received on your personal tax [00:04:00] situation.
And so most audits at that level are going to be around things like the earned income tax credit refundable credits, mismatched income reporting, right? You receive the 10 99 for a certain dollar amount, but then on your tax return you only res reported, you know, 75% of that do dollar amount. So if you have some inconsistencies like that, you can actually trigger an IRS audit.
100K to 500K Growing Complexity
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Fabrice Metan: Now between a hundred to 500,000, again, we're looking at around 0.1%. At that point, the income is mainly from professionals, small business owners, consultants, real estate investors starts having a little bit more complexity, right? Schedule C, schedule E, those kind of schedules. And so.
The audit audit risk at that point still kind of remains fairly low, but it does increase right as the income [00:05:00] starts going up and starts showing a little bit more complexity
now between 250 to 500,000, again, we are still around 0.1%, but the scrutiny begins to increase. This is where a lot of successful entrepreneurs can fail. Of how they handle their documentation in the backend. So the return is gonna start showing more how can I say that? Multiple sources of income, K ones from different partnerships, real estate activity, business deductions, those kind of things.
And so it, it becomes, it starts becoming a little bit more complex and at that point, you might experience a little bit more scrutiny.
500K Plus When Risk Jumps
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Fabrice Metan: Now, once you reach the $500,000 threshold, that is when the audit risk truly starts increasing, about 0.6%. In other [00:06:00] words, six times higher than middle income taxpayers.
This is where your high income performing entrepreneurs land, multiple businesses, investment properties, partnership interest, basically a little bit more complicated at that point to where the IS has to pay, pay a little bit more attention.
Now? What happens once you reach the million dollar mark? Around 1.1% of returns get audited. That means about 11 out of every thousand millionaires will experience an audit.
At that point, the IRS also receives extensive third party reporting. So they have a lot more documents that can be used to verify the information on your return. And because of this, it's a lot easier for the IRS to analyze your returns and kind of seeing if there are some inconsistencies, [00:07:00] right? So you have to be very careful as your income continues to grow.
Why Entrepreneurs Get Scrutinized
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Fabrice Metan: Now, why do entrepreneurs face more scrutiny when it comes to IRS audits? Well, you have to think about it, right? Most W2 earners have to pay their taxes and then spend entrepreneurs get to spend and then pay their taxes. So the IRS does not get the opportunity. To see your income and get a piece of that prior to you getting the opportunity to spend your cash flow.
And so of course, once they get the report, once they get the return, they have to do a little bit more investigation to make sure that everything you're reporting is accurate. And as you start claiming some of the deductions that are, we are allowed to claim travel, meals, vehicle expenses equipment, those kind of things.
Of course they have to dig a little bit deeper to make sure that all of those numbers are accurate.
[00:08:00] And also if you're dealing with multiple entities, right? Get a K one from a partnership here, from an S corp. You know, maybe your name is listed somewhere on the C corp. You could then create a little bit more reasons for the IRS to think, Hmm, let's make sure that we're tracing all of that income from all DI directions, right?
And of course, your dis your deductions are gonna be larger, right? If your business earns a hundred thousand dollars, you might spend, you know, $5,000 in, in meals, right? Every year while a million dollar business. Might easily spend 50 to a hundred thousand dollars in that category depending on what they do.
And so of course, the numbers are higher and will be under more scrutiny.
Cash Businesses and Key Takeaways
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Fabrice Metan: Now you also have to be careful if you are in a very cash intensive business. You know, like, construction, restaurants, salons retail. When [00:09:00] it's very cash intensive, it's very hard for the IRS to know where all of the money went. Did you actually receive it in cash and did not report, right? And so of course, they have to pay a little bit more attention to those businesses.
So the key takeaway here for entrepreneurs especially is not necessarily to be scared, but to be proactive. Right to always plan and to always know how to back up some of the information that you're providing on the returns.
POND Rule for Deductions
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Fabrice Metan: You know, the, there's another video in the past that I made that received a lot of, you know, that was, that was very well accepted by, by entrepreneurs where I was teaching people a simple acronym to determine what makes an expense a tax write off. And my acronym was Pond, POND, where we talk about primary, ordinary, necessary, and documented. That last part is very important when it comes to an audit documented, right?
So primary means that whatever that expense [00:10:00] is is primarily for the business. In other words, if you take a, you know, meals deduction, we typically get 50% of a tax write off on that because it could be. Halfway for yourself, right? If you're sitting down with someone and having lunch and discussing business, the IRS is not paying for your meal.
That would be considered a personal meal. The IRS is technically paying for the person you're sitting with, right? And so, of course it has to be basically primary to the business. So 50% or more for, you know, for the most part, ordinary, because it's something that is typical for the type of business that you run.
Necessary because you must have that type of expense to make money in your business and document it because you have to have some sort of backup, whether it's receipts you know, settlement sheets when it comes to real estate transactions, those kind of things. Right?
Closing Advice and Get Help
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Fabrice Metan: And so in closing. [00:11:00] You should never let an IRS audit stop you from using legitimate tax strategies. That is why the IRS code is here, is to understand exactly what's legitimate, and what we can actually use against our income. But as 7, 6 5 entrepreneurs, as you see your income grow.
Especially as you approach the $500,000 mark, you have to understand that you will be under more scrutiny. And so it becomes more and more important to make sure that every strategy that is used is documented and fully supported. So when we handle, you know, strategies for our tax planning clients, we always wanna make sure that every position that we take is defensible, is back up by the code.
We have supporting documents. Sometimes court cases to be able to stand behind the positions that we're taking to help our clients save on taxes. At the end of the day, smart tax [00:12:00] planning isn't about being aggressive, it's about being proactive and prepared.
Okay, so before I leave you today if you've been concerned about utilizing tax strategies within your own tax situation because you are unsu as to whether this is something that you'll be able to do without experiencing an audit you're not exactly sure how to present it in a way that the IRS could actually accept and understand.
And you kind of need help. When it comes to tax strategy you know, you might have received notices in the past that scares you away from doing the right things in your per personal situation. Definitely reach out. One of our experts can probably help. If you visit us@simplifymynumbers.com to schedule a consultation, talk about your personal situation so we can tell you exactly how to take certain positions and have the right backups to defend yourself in case of an audit.
[00:13:00]