After surviving two I.R.S. audits -- and as this series concludes, I'd like to highlight several hints to help you prevent and survive (if necessary) an I.R.S. audit in your future.
Keep careful records and be prepared to justify every expense. Especially in this tough economy, there may be more artists and makers losing money. Losing money is not a problem in and of itself, but in my opinion, this seems to be an I.R.S. red flag for an audit.
Start RIGHT NOW improving your records. No time like the present. Keep every receipt and record it.
If you are called in for an audit, spend a lot of time preparing by reviewing your records and understanding your accounting practices.
You need to demonstrate confidence to the I.R.S. that you have every piece of paper they want and that you know exactly where it is in your files. (My husband actually made us "role play" for over an hour.)
Everything in your "office" or "studio" needs to be for business. The I.R.S. has very clear rules about deducting the expenses associated with a home "office" or "studio." Watch Lesson 4 recommend in the previous post. To summarize these rules, if you use the same space for your family or private life, don't take deductions for that space. It is another I.R.S. red flag.
The information and advice on ASK Harriete are provided for your assistance and should not be considered legal advice. Use your best judgment and consider using professional tax advice as necessary.
This post was updated on January 22, 2022.