Home business owners shudder at the sound of the word ‘Audit’. Collectively, we should. Why? When it comes to being audited, we are often ill-prepared, or not prepared at all.
Let’s clear up some myths. While home business owners are 3 times more likely to get audited, than W-2 wage-earners, we are no more likely to be audited than any other business owner. As your income rises, your chances of audit do go up, but on a regular day, there has to be a series of red flags that prompt an audit for it to happen.
Let’s say that you hit the lotto, and it’s time for you to get audited. If the IRS asked for documentation to support your claims for expenses and deductions, how would you react? Would you be able to pull a file? OR would you have a massive heart attack? Would you be confident that your documentation is iron clad? OR would you be shakin’ in your boots?
As a tax professional, I can tell you that the majority of home business owners fail with documentation. It’s that failure that can cost you thousands of dollars each year. When it comes to the IRS, you are guilty until you prove yourself innocent. Indisputable documentation is the only defense in an audit!
6 Critical Components of Documentation
Do you remember the 5 W’s and H from school – who, what, when, where, why, and How [much]? If your documentation answers all those questions, you’re on track to stand tall in an audit.
Scenario: You’re a Direct Sales Consultant who takes your best customer, Lois Lane, out to lunch to show her the Ultra Post 2000 to use for marketing her business online. This meeting was pre-arranged (bonus tip).
Your documentation must contain:
- Who? – Client – Lois Lane
- What? Lunch meeting
- When? February 21, 2017 noon
- Where? Mack’s Sandwich Shop, 123 Main Street, Your Town, State
- Why? Show Lois the Ultra post 2000 to use for marketing her business online
- How much? $37.00 + $10.00 tip = $47.00
Your receipt will contain part of the information. You will have to document the rest. You must provide the receipt (original or copy), and all of the above information. In the event of an audit, this would be indisputable documentation!
The mistake home business owners make is assuming all this information is unnecessary. That couldn’t be more incorrect. A charge on your credit or debit card is also not sufficient information. You must have the receipt, or a copy, with all of the above information to stand up to the IRS.
Research also shows that a whopping 85% of home business owners overpay in taxes. Not being able to claim expenses, because of lack of documentation, is just one of the reasons!
Wanna know what else you might be missing? Grab of a copy of the 5 Frequently Overlooked Tax Deductions for Home Business owners to find out!