My morning coffee with the I.R.S. MAN - Tips to prevent or smooth your audit with the I.R.S.

Coming up is the "anniversary" of my I.R.S. audit. Three summers ago, I was "invited" for a morning visit with the I.R.S. What a petrifying experience!  Coffee was politely offered but my adrenaline was pumping already.  Everything turned out fine...but perhaps you may gain some insight from how I survived economically unscathed and on excellent terms with the I.R.S.

Here are 3 basic tips based on my experience that you should implement immediately (if you are not doing this already).

 Consuming Conversation © 2001-2004
A series of 200 cups.
Recycled tin cans, brass, s.silver,
Artist: Harriete Estel Berman
View the entire series on my website. 

1) Keep your business banking accounts COMPLETELY SEPARATE from your personal banking. I mean completely separate! For years I had my business bank accounts at a different bank than my personal bank accounts.  I often grumbled and chafed at this extra deposit and bookkeeping effort with two different banks.

I'll never complain again. It paid off BIG when the I.R.S. MAN casually asked questions to glean if my art business funds were co-mingled with my personal funds. One of the first levels of inquiry (even before the audit) is to discover any commingling of business money with personal money. Once the I.R.S. man found out that I not only had separate business and personal accounts but further separated them at different banks ..that topic was OVER. He saw no glimmer of possibility of catching me in a wrongful accounting of my business income or expenses with personal checking and savings or credit cards.

 

  Consuming Conversation © 2001-2004
  Recycled tin cans, brass, s.silver,
  Artist: Harriete Estel Berman
  Photo Credit: Philip Cohen
 View the entire series on my website.

2) Keep detailed and accurate records. The I.R.S. asked for specific categories of receipts in advance. I was required to bring this portion of documentation to the I.R.S. office that morning.  In this case, they wanted to look at my Advertising Expenses for the year. While it was a tremendous amount of effort to separate my Advertising Expense receipts (month by month) from all the other receipts (it took about fourteen hours), I was prepared to show each and every receipt. 

He started out asking for the Advertising Expenses for a particular month in random order. He jumped around, March, August, October, etc. Each and every time I had every receipt (already organized by month) ready to go without hesitation or excuse.

When it was obvious that I was well organized (thanks to Emiko Oye, my studio assistant) and he could find no mistakes, he ceased this line of questioning. 

 

  Consuming Conversation © 2001-2004
  Recycled tin cans, brass, s.silver,
  Artist: Harriete Estel Berman
  View the entire series and video.
 

3) The primary test is whether you act like a business. I was surprised to come to the realization that the I.R.S. is not interested in whether I was a professional success or a financial success. They did not care about my exhibitions or gallery representations.  They did not care about my education, publications, or professional visibility. They only wanted to determine whether I performed like a business.

The I.R.S. measures business standards with definitions that have nothing to do with art or craft. While my advertising expenses must have been a red flag since they were so high for a small business (professional photography is a significant expense). The I.R.S. only wanted to see that I kept complete and accurate records like a business.

 

 

   Coffee Φ: The Golden Ratio © 2004
  Recycled tin cans, brass, s.silver,
  Artist: Harriete Estel Berman
  Photo Credit: Philip Cohen

 

My advice:
-Keep your business checking account separate.
-Never co-mingle personal and business money.
-Get a separate credit card for your business.
-Keep detailed and accurate records of every business expense.
-Act like a business. 

Do all of this before you have coffee with the I.R.S.

Harriete

Here are the 9 criteria from the I.R.S. used to figure out if you are a business (copied directly from the I.R.S. website).

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for-profit or a hobby:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

This post was updated on January 19, 2022.