Best Business Practices for Photographers [105]
With these types of statistics, it becomes understandable why self-employed businesspeople have such a high probability of being audited. On the opposite end of the spectrum, businesses that are corporations account for about 1 percent of all audits, according to my accountant.
The 2009 IRS annual data book, released in March of 2009, shows the following statistics:
For nonfarm business returns by size of total gross receipts: under $25,000, 1.2% (down from 1.3% for FY 2007); $25,000 under $100,000, 1.9% (down from 2% for FY 2007); $100,000 under $200,000, 3.8% (down from 6.2% for FY 2007); and $200,000 or more, 0.6% (down from 1.9% for FY 2007).
For returns with total positive income (TPI) of at least $200,000 and less than $1 million, the audit rate was 2.6 percent for non-business returns (down from 2 percent for FY 2007) and 2.8 percent for business returns (down from 2.9 percent for FY 2007). For returns with TPI of $1 million or more, the audit rate was 5.6 percent (down from 9.3 percent).
The audit rates for entities were as follows: a. Corporations with less than $10 million of assets, 1.0 percent (up from 0.9 percent for FY 2007)
b. Corporations with $10 million or more of assets, 15.3 percent (down from 16.8 percent for FY 2007)
c. S corporations, 0.4 percent (down from 0.5 percent for FY 2007)
d. Partnerships, 0.4 percent (same as FY 2007)
Historically, your odds were better for not being audited, but let's look at things in a relative fashion.
If you are a sole proprietor, your odds of being audited, according to the 2006 IRS data book, were 0.97 percent (in other words, less than 1 percent). However, if you were an S-corp or a partnership, your odds were 0.38 and 0.36 percent, respectively. Contemplated a different way, you are 2.6 times less likely to get audited if your business is an S-corp or a partnership. Further, just 23.6 percent of audits of individuals were done in person by an examiner. Thus, more than 75 percent of audits were done as correspondence audits, where you and the IRS simply exchange letters and information, and there is no in-person examination of your books.
Lastly, according to the 2009 data book, the no-change rate—that is, returns accepted without any changes following an examination—is 11 percent for in-person examinations and 15 percent when the examination is a correspondence audit.
While one Yankelovich poll reports that one in five taxpayers admits to cheating on their taxes, it could be argued that it is how you define cheating, in degrees. If you made a personal phone call on a business telephone or mailed a letter using a stamp that the business paid for, in the most technical of senses, you have cheated. The IRS is not spending examination time on those types of tax cheats; it is the people who make egregious deductions that are personal but that are classified as business.
So, you may ask, with so few people getting audited, why devote an entire chapter of this book to the audit? Photographers all too often find themselves in an audit situation, and it can be one of the scariest times because of the unknown.
Preparing for the Audit
Here is a short list of things you should do to prepare for the audit.
1. Understand that this is not a personal attack on you. It is just business, and the IRS is there to get more money from you, but that money is what you legally owe, if you legally owe anything more than you said you do.
2. Get an accountant, preferably the one who prepared the return for you and signed the tax form along with you. Having an accountant prepare a return for you in the first place is a lot less expensive than you think, so look into it. (Refer to Chapter 11.) If you are someone who likes to take big risks and goes it alone, when you find yourself in over your head during an audit examination, and you realize you should have consulted with a tax professional, you may request a recess of the audit to consult with (and hopefully by this time hire on) a tax professional.
3. Validate and locate