Blogging along, then a letter arrives… Time for an audit? Here are a few suggestions on how to survive when your blog is under audit.
Disclaimer: Take audits seriously and if you can afford to hire someone to represent you do it! The following are suggestions based on experiences of clients at my day job.
What to provide? Do I hand it all over? It is imperative that the only records provided are the ones they ask for and even then, willingly handing over records can hurt the bottom line as well.
- Bank Records: The benefit to having a separate bank account is to provide only these statements. Otherwise if everything is given then they’ll try to count nontaxable income as taxable. Nontaxable income can include: Refunds, credits, coupons, rebates, do you have documents for all of this? If not it’s income! Nooo!
- Printouts of income producing websites: i.e. Google Adsense and nothing more
- Use QuickBooks or other software to track everything? Do you tell this to the auditor? If confirmed they’ll ask for the download of the year under audit. Garbage in = Garbage out and its added to your taxes. Try to provide receipts, since the blog is small there will be few records anyway. If QuickBooks is your thing, make sure the data is accurate.
- Business Use of Home: If they ask to tour your office (business use of home deduction) be sure to get it set up before they arrive:
- is it exclusive to blog? Move kids toys out of there
- is there a door? Make sure the space is closed off to rest of house
- Do you really want them at your house? If so, don’t leave out your expensive collection of high priced nick-knacks, because they will notice it and ask you how you pay for it.
- Other receipts:
- Internet connection: make sure personal use is allocated out of the bill
- Print receipts out of email
- Keep paper receipts
- Hobby Question: This is bad, very bad, see my article on how to combat this here.
- Interview: Do everything possible to avoid face to face contact with an auditor, because they’ll get you to talk about what you love (your business) and then they’ll find out more than you need to share. Also, be cautious of any phone calls from the government due to rash of scams.
The timeline for an audit:
- Receive a letter: Usually 30 – 45 days to respond. If they contact via phone, be suspicious!
- First face-to-face meeting: Send the representative, but if you must attend set it up for a Friday. Reasoning for this is the auditor won’t be able to meet with their manager until after the weekend, and hopefully the auditor is thinking about their weekend and not your records
- Missing records: If they ask for more proof of expenses (i.e. a document request) then they’ll give a deadline, its not the end all if this is missed, records get lost, moldy, burned, shredded. It happens.
- Final Report: Usually two weeks (14 days) to respond
- First Notice: 30 days to respond
- Statutory Notice of Deficiency: 120 days, now is the time to send in records
- Tax Court: unknown
Audit Survival Guide:
- Less is better
- Don’t give them what they don’t need
- Keep separate bank accounts for business income
- Keep records now
- Organize emails: Set up income and expense folders
- Hire Professional Help!