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Don't Mess with the IRS!

by Jacqueline McLaughlin Hale

So, you’ve got your web site; you’ve studied Internet marketing. Your site is generating thousands of hits per month. You’re making sales and you’re feeling successful! You are successful! But if I asked you about your record keeping you’d probably say, "Oh yeah that. I know I’ve got to get better at it but I really hate it and let’s face it, record keeping doesn’t generate income. I’ll deal with that at the end of the year when I have to get my tax records in order!"

Therein lies the problem. No one wants to think about record keeping until it’s too late, until it’s the end of the year and your tax professional is hounding you for data to prepare your tax return or until the unthinkable happens and you are selected for an audit! What’s worse is that it may not be just the IRS who wants to audit your records. No, there are many different taxing authorities out there all of who want a piece of your business!

If you’re like most people I know starting a home based or internet business can be very frightening. Not because of the product or service, the promotional or marketing efforts, or the customer service issues but because of the increased paperwork and the looming threat of taxes and the IRS. Starting a business, any kind of business means more tax forms, more filings, more risk, more threat of an audit! It can be overwhelming. But it doesn’t have to be.

Oh I know you may be thinking that you pay someone else to handle this so you don’t have to worry about it. But let’s face, no one is going to care about your finances the way that you do. So it pays to be informed. Have you ever heard the expression "garbage in, garbage out"? If you’re not adequately informed, if you don’t know what to provide to your accountant or tax preparer you’ll wind up with garbage. Your accounting professional is only as good as the information you provide to them.

Your books and your taxes do not have to be that complicated or that confusing and no, I’m not that crazy! All of the anxiety over extra tax forms, and increased filings and all of the fear behind an IRS audit can be lessened by better organization.

What is better organization? Well, it starts at the very beginning...

It means that you’ve clearly defined the product or service you want to provide. You know who your customers will be, how much you’ll charge and how you’ll deliver. It demands that you thoroughly investigate and understand your target market and your competition. It requires that you research and know the differences between a "C" Corp, an "S" Corp, an "LLC" and not incorporating at all. It assumes you have made an informed decision about your entity’s identity and that you are aware of the tax and legal consequences behind that decision.

Better organization means you have investigated the differences between an independent contractor and an employee and that you have classified your associates appropriately. It means you are informed of the various taxing authorities that have jurisdiction over your business and that you file with them in a timely and accurate manner.

Better organization is demonstrated by a well-planned office and complete business files. Records are maintained in a logical manner and support is obtained for all business transactions. Better organization assumes an overall understanding of cash and accrual basis accounting and an awareness of the method selected. It dictates that only "legitimate business expenses" (the only expenses that are deductible) are transacted and that they are kept extremely separated from personal business. Record keeping is beyond reproach.

Better organization means that you know your records as well as you know your business. Believe it or not an auditor will concern themselves with all of this and more. If they don’t, they cannot conduct an effective audit. A comprehensive knowledge of your market, product, delivery system and your business identity help them to appreciate the resulting transactions on your tax return. It’s all interrelated. It’s all relevant.

So, if you’re wondering now if there’s anything you can do to avoid an audit or to "stack the deck in your favor", I asked that same question of the IRS auditors with whom I worked. Their answer? It all depends on the size of the IRS office in your area, their staffing and the luck of the draw. No, there’s nothing you can do. But if your business has been well planned, if your transactions have been well documented, if your records are organized and easily accessible and if your tax return reflects legitimate business deductions----then you have nothing to worry about!

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