Best Business Practices for Photographers [106]
Further, you can contact your bank for missing statements going back several years (sometimes for a fee), as well as a number of other businesses from which you made purchases. You would be surprised at the help you get from customer service agents when you call and say, "I wish I wasn't calling you today, but I am in the middle of an IRS audit. I have a credit card charge for $176.11 that was posted on my account on March 27 two years ago, and I do not have a copy of that receipt for my audit records. I need you to help me get a copy of that receipt, please." It may take just a minute or two to get an e-mail, an hour or two to get it faxed, or a week or so to get it via postal mail, but you can get it. This is called reconstructing tax records, and it is allowable by the IRS. In some cases, this may be the basis for you to request a delay in the audit process so you may wait for these records to arrive in the mail.
4. Thoroughly review that what's in the records you are providing is just what belongs there. For example, when I store my tax records for each year, I store with them my insurance policies that include itemized items covered, the policy term documents, and so on. That item is not a receipt, it is the product/service we purchased, and what is required to be included in the insurance receipts folder is the invoice from the insurance agent only. If the examining agent wants to see evidence that the policy covers just business items, he or she then would request the policy itself, but it is not a tax record any more than including your Photoshop software license or DVD is. Further, I also store correspondence I had with the bank when they wrote to me confirming a wire transfer overseas or a request for new checks. These are not receipts, but convenience called for me to store them with the tax records each year. When delivering the records to your accountant, include just the receipts that prove the purchases you made and deducted as an expense, or whatever else was asked for.
5. Relative to item 4, deliver what is asked for and only what is asked for. If the examiner asks for your receipts proving equipment purchases, do not include receipts for photo supplies or other non-germane receipts. Not only will they be additional documents that could get in the way of the examiner's review, they could also trigger a broadening of the audit if the irrelevant receipts raise a flag for the examiner. Do not include previous years' returns unless they are requested. Your accountant will help you present only what is asked for and will help you to clarify what any ambiguous request calls for.
6. If possible, avoid hosting the auditor in your business or home office. The audit can take place in the offices of your tax professional or at the IRS' offices. Not only will an auditor in your business or home office be a distraction from the daily operation of your business, but questions that were not initially being asked may arise. If an IRS examiner turns up at your business or home office, unless they have a court order, you do not have to let them in, and the only person who can invite them in is someone who is a rightful occupant of the home office or, in the case of a brick-and-mortar standalone business, an employee of the business. Note, however, that if you deny the auditor access to your home office, he or she may disallow your home office deduction. In my case, the auditor did want to validate the amount of space being used solely for the