It was a beautiful fall afternoon. It had been a busy, productive week, and the entire staff at the studio was looking forward to the weekend. A single phone call from my receptionist changed everything: "Greg, so-and-so from the Illinois Department of Revenue is on the phone. You're being audited."
Being the subject of a random audit can strike fear into even the most successful studio owner. And even before the process begins, an audit takes up time, creates frustration, and costs money. Here are a few tips that helped us get though the process.
- Take a deep breath! It's very unusual to be audited. Less than 1 percent of all U.S. corporations are audited each year. But if you are audited, trust me—this is not worth losing sleep over. The IRS and your local state revenue department are just trying to collect money that is due. Don't feel this is a personal attack on you or your business.
- Keep a good set of honest, clear books. This will create less work for you and for the auditor. Dumping a shoebox full of receipts on the auditor's desk is asking for trouble. If you run your studio like the business it is, all expenses and income should be dutifully reported. Get in the habit of keeping good tax records year-round and using a personal filing system to keep them in order.
Primary records are bills and receipts. Secondary records may be spreadsheets, mileage logs, or other summary information. If you feel that you're a little short in the record-keeping area, you may have to go back through the time period being audited to re-create records as accurately as possible. For instance, if you have claimed medical expenses, it's possible that your doctor may have those records.
A great deal depends on what shape your records are in. An audit often takes place long after you've filed. If your records aren't clear, it will be pretty difficult to defend your entries.
- Seek professional help. For many years, we at the Village Photographer have been blessed to have an excellent CPA by our side. We do the month-to-month accounting, and he does all the year-end and tax preparation. You have the legal right to be represented by your accountant or tax attorney, and you should take advantage of that opportunity.
We asked our CPA to meet with the auditor, signing power of attorney over to him. Your accountant is in a better position to be objective about the whole process. Your tax preparer knows what the auditor wants to hear and will discuss problems and answer questions more intelligently than you.
- Leave your attitude at home. This is not the time to reveal to the world your personal feelings about the unfairness of the tax system or the intelligence level of the people who work for the government. Don't give the auditor a reason to want to dig for something. At the same time, don't be intimidated. I was advised by my accountant not to volunteer anything. Be forthcoming with information, but only answer questions that are directed to you. Don't be surly or impatient, but even more important, don't be afraid.
The IRS auditor is not your friend. You can be sure of two things with an auditor: First, he pays his taxes. Second, there is an implicit assumption that you may have done something wrong, or you wouldn't be there in the first place.
Be on time and be organized. Provide the auditor with the information requested in a timely manner. Yes, even auditors are human. Treat them with respect and it will save both of you time and, more importantly, save you money.
- Be prepared to pay a fine. The good news is that not all audits result in the taxpayer owing extra taxes. Sometimes an audit will show that the IRS actually owes you instead of the other way around. Most often, however, it will cost you money. Chances are, though, that you will not end up in jail unless you have been deliberately defrauding the government. Even then, a check can buy forgiveness.
- The best defense is a good offense. An audit can consist of one short visit or several visits over an extended length of time. It depends upon the thoroughness of the auditor and the complexity of the return you filed. The result will depend on how accurately your return was completed, how well you handled the audit interviews, your auditor's opinions about allowable deductions, and whether he and his wife are getting along. The more organized your records are and the better your attitude, the greater your chances of a positive outcome.
I'm not an accountant, but I can offer a few tips from my own experience:
- Save all receipts for supplies you purchase for your business, including computer paper, business cards, pens, lab bills, and rent. Most of your advertising expenses can be deducted, as well as give-away items. Phone and Internet access can also be deducted.
- Incorporate your business. We operate as a Subchapter S corporation in the State of Illinois. Ask your accountant if incorporating will work for you.
- If you operate out of your home, measure your work area and divide by the square footage of your home. The answer is the fraction of your home-related business expenses you can claim.
As for our recent audit, after sporadic visits by the auditor over a four-month period, we were assessed a small fine and some interest. Our accountant told us that because we had clear, accurate books and accounting, our chances of being audited again were slim.
Greg Stangl, M. Photog., Cr. CPP, is a popular speaker, writer, and photographer. To learn more about his classes, visit his website at www.prospeak1.com. He will be teaching a business, sales, and marketing class at the Florida School in June 2007.