Audits and recent IRS Policies
Important information about recent IRS changes concerning tax return examination policies (audits)!
With the increase in small business audits, and the trend toward classifying businesses as "hobbies", we have put together some recommendations to help you "establish" the fact that you are a legitimate business, in case you should be chosen to be audited.
- Keep complete and accurate records of all business transactions. This includes sales, expenses, travel, and especially an accurate log of miles driven for your business. This along with carrying on your activities in a business-like manner will add to the credibility of your business.
- Open a separate "business only" checking account, and/or credit card account.
- These account(s) should have the name of your business printed on them, and should be used for BUSINESS ONLY, no personal funds in or out of the account. This makes tracking of your business expenses easier in case of an audit, as well as helps establish your business as legitimate.
- Have a written plan for how you intend to make your business improve, and become more profitable, and that your business and its assets will increase in value.
- This should include how much time you spend on the business each week, how you are going to increase your knowledge and abilities to do the business, plans for advertising, recruiting, training you are getting, the advisors and other business associates you are working with, etc. It should also include goals and projections for your business in future years. This plan should be reviewed at least annually, and adjusted accordingly.
- Another factor used to determine hobby vs. business, is the amount of, and frequency of profits in the business. If a business continues to show losses for more then 2 consecutive years, the IRS will scrutinize even closer. A business typically will show a profit at least 3 of 5 years. This is not a hard, fast, rule, but is an important factor in the IRS determination of "Hobby vs. Business."
Last Modified: 01/23/2009
