Surviving an I.R.S. audit - No change!

Last Thursday was my I.R.S. audit.  ARRGGGHHH!  We arrived at a location (which apparently is illegal to disclose). There were no signs on the building.  This felt more like a secret liaison than an appointment with my government.
 

Both Terry (Secretary), Emiko (Studio Assistant), and my husband (taking the picture) came with me. They had prepared the documentation for the audit and reviewed and scrutinized all the records for the year in question. NOTE the extra LARGE red bag full of our papers. We were PREPARED! We even practiced!

Over the next couple of weeks, I am going to share how to survive (at least how I survived) an I.R.S. audit and ultimately heard the sweetest words a civil servant could utter,  "NO CHANGE!"  -- the best outcome you can expect.

I am not a tax adviser, just a "maker" like most of the readers of ASK Harriete who like to make work far better than keep business records.  But if you want to be in the "business of art or craft" (instead of a hobby), then accurate and complete records are required to show that you are "taking care of business."  The I.R.S. requires that you act like a business and your records are the evidence.

The previous post talked about titles. Titles are your first step in accurate Inventory Records. Think about it, every sofa, sweater, or shoe in the store has a name. Do you know what else they have? An inventory number!

April Flower Pin © 2010
recycled tin cans, sterling silver,
Artist: Harriete Estel Berman
Inventory #61.4L8.10/ 575

Every single item you make, whether it is one of a kind or multiple, needs an inventory number. My inventory numbers include a code that is a description, the date made, and the price.  The inventory number of this pin is:  Flower pin 61.4L8.10/ 575. This means it is the 61st Flower pin, 4 layers, recorded to inventory in August 2010, and the price is $575. Each group of work has different information in the Inventory Number. I have talked about Inventory Numbers before on ASK Harriete.

 

AOL Earrings08  © 2010
recycled tin cans, sterling silver,
Artist: Harriete Estel Berman

INVENTORY RECORDS are an absolute must to survive your I.R.S. audit. Are you ready?

Every item needs:
- title
- inventory number  (including date made)
- date sold
- materials list, cost of materials, and cost of labor to calculate your FG (Finished Goods) and COGS (Cost of Goods Sold).

An itemized COGS (Cost of Goods Sold) is one of the first items the I.R.S. agent asked for on Thursday.  Are you ready for an I.R.S. audit? Do you know your Cost of Goods Sold?

We will go over COGS (Cost of Goods Sold) in the next post.

Harriete

This post was updated on January 21, 2022.