Notes on IRS Initiative - Think Like an Auditor!

Who is this enforcement budget aimed at? The new enforcement (auditing) budget and parameters includes, but isn’t specifically targeted at, Direct Selling Professionals.  Much like other Business from Home professionals, Direct Selling Professionals who have shown losses, a history of losses, or hit-and-miss revenues may be isolated for further scrutiny. An audit itself is not a death sentence.

What do I do about it if my business fits the profile?
Don’t panic, but be smart. For years you’ve heard us teaching you about how you must prove you have an intention for profit in your business, even if you have a year (or series of years) with losses. We call this the Prove Intent Rule.  Intentions are hard to prove, but prove them you must.

The primary activities you can “do” to prove you have an intention for profit are:

1.  Generate revenue by working your business. There is no “business” without revenue.  Revenue is income resulting from your efforts in working your business.  (money from sales, commission checks, etc.)  Think like an auditor: If there is little to no revenue, then why should business deductions be allowed? Smells like a hobby.

2.  Books & Records. One of the primary ways you prove your profit intention is by your BOOKS, not by your Records.  (Records support your Books as backup documentation.)  Books are your own record of where your business money came from, where it went, how each financial decision (money spent) affected your bottom line, and the appropriate business reporting.  Records are things like your receipts, copies of your bank statements, your mileage log, calendar, and the stuff you see when you log into your bank’s website.  Think like an auditor: This business owner doesn’t keep an account of their cash flow or sources of revenue! Profit is a result of spending less than one makes. If this business owner is serious about profit, I don’t see it. Smells like a hobby and makes your business a perfect candidate for reclassification.

3.  Improve your business by constantly measuring your progress against your business plan. If you’re not profitable, ask yourself why and figure out the answer. (losses are not good, no matter what someone told you)  Your pay-less-tax-strategy can’t be “let’s not be profitable” if you are in business legitimately.  Think like an auditor:  If a business owner said to you,  “Oops, guess I didn’t make a profit this year; but I don’t know why.”  Smells like hobby, not good.

4.  Get lean.  Income-Expenses=Profit. If you spending more than you are earning, then you need a Spending Plan (operations budget). Without one, it’ll be really hard to prove a profit intention to protect your right to take business deductions.  Think like an auditor: This business owner doesn’t use an operations budget and measure their progress against their goals? Smells like a hobby to me, they clearly don’t have an intention for profit here.

5.  Love isn’t enough. Believe it or not, IRS is looking at “elements of personal pleasure” in Direct Selling Businesses.  Whether it’s selling skin care or nutritional products, you can’t love the thing your Company “does” more than the money you should be making if you want to prove an intention for profit.  Think like an auditor: If you would do it for free because you love it so much, then you have no emotional incentive to navigate your business into Profit and it won’t matter if you’re not profitable. That’s the opposite of legitimate business.

What do I do if I get a notice that I’m being Audited? You need to call your CPA immediately; they will deal with IRS on your behalf.  Do not try to save a few bucks (or) save face by attempting to do it yourself.   The budget has been allocated to audit more home-based business owners and Direct Selling professionals.  You’re an honest person, let you CPA professionally handle them directly; and you deal directly with your CPA. This will be less stressful and smarter all the way around.