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As promised, here's how to avoid the NASTY situation with the IRS described below.
Don't fall prey to a sideways situations on an IRS AUDIT of your side hustle!
and AVOID PENALTIES!
As promised, here's how to avoid the NASTY situation with the IRS described below.
Don't fall prey to a sideways situations on an IRS AUDIT of your side hustle!
and AVOID PENALTIES!
Step 1 - Use the right tax treatment on your transactions.
Learn some tax or hire someone.
I'm not promoting myself here because I'm not currently taking clients.
I don't tinker with my car's powertrain or grow my own penicillin to fight a sinus infection.
Hire a tax person.
Learn some tax or hire someone.
I'm not promoting myself here because I'm not currently taking clients.
I don't tinker with my car's powertrain or grow my own penicillin to fight a sinus infection.
Hire a tax person.
It doesn't cost that much and they usually pay for themselves in stuff you would miss.
@DaveRamsey even says this and who is cheaper than him?!
If you just have to DIY, then learn some tax. Take a little course. Read a book. Not recommended, but might be better than nothing.
@DaveRamsey even says this and who is cheaper than him?!
If you just have to DIY, then learn some tax. Take a little course. Read a book. Not recommended, but might be better than nothing.
The biggest place I have seen audits go sideways is people just booking things completely wrong:
-Putting charitable contributions on their schedule C.
-Accidently writing off asset purchases.
-Taking advice from their cousin.
Step 1 - Don't do that stuff. Hire or be smart!
-Putting charitable contributions on their schedule C.
-Accidently writing off asset purchases.
-Taking advice from their cousin.
Step 1 - Don't do that stuff. Hire or be smart!
Getting Step 1 right is your most important step in your AUDIT DEFENSE:
The IRS algorithm is looking for odd things. The wrong treatment on your tax return just sticks out.
When the agent shows up and you don't have a tax person/don't know tax, you are at their mercy.
The IRS algorithm is looking for odd things. The wrong treatment on your tax return just sticks out.
When the agent shows up and you don't have a tax person/don't know tax, you are at their mercy.
Step 2 - Books!
Once you know how the basics of your business should be treated for tax, then actually keep good books!
Maybe you've got Step 1 right, but your return still looks weird.
If you were an auditor, how would you view the follow examples?:
Once you know how the basics of your business should be treated for tax, then actually keep good books!
Maybe you've got Step 1 right, but your return still looks weird.
If you were an auditor, how would you view the follow examples?:
1) Taxpayer produced a Profit and Loss report and Balance Sheet upon request that were professionally prepared, while walking me through key transactions.
2) Taxpayer had no financial statements and said they have been meaning to get to that?
2) Taxpayer had no financial statements and said they have been meaning to get to that?
It doesn't have to be fancy, but your tax return requires a Profit & Loss statement for your business and sometimes a Balance Sheet.
If you can't produce these from your own books, it gives the auditor no confidence in your numbers.
If you can, you stand out in a good way.
If you can't produce these from your own books, it gives the auditor no confidence in your numbers.
If you can, you stand out in a good way.
You don't have to become an expert in QuickBooks.
It's probably not worth your time.
Again, you can hire that out!... or you can use a spreadsheet.
You can literally copy the lines of your business tax return - Schedule C in the US or whatever Profit & Loss you have in...
It's probably not worth your time.
Again, you can hire that out!... or you can use a spreadsheet.
You can literally copy the lines of your business tax return - Schedule C in the US or whatever Profit & Loss you have in...
...other countries.
Have a tab for each line.
Every time you spend something, put it in the tab you think it goes.
Have the tabs total to the front page.
Write a little description.
You can even do it once a month off your bank & credit card statements.
Have a tab for each line.
Every time you spend something, put it in the tab you think it goes.
Have the tabs total to the front page.
Write a little description.
You can even do it once a month off your bank & credit card statements.
You can either learn how each item could be treated or you tax person can tell you very quickly!
Step 2 - Just keep some basic books!
Step 2 - Just keep some basic books!
Step 3 - Records
Imagine these scenarios:
1) Taxpayer claimed $10,000 of mileage deductions in a personal car, but when asked for support replied, "business driving and stuff."
2) Taxpayer claimed $7,893 of mileage deductions in a personal car. When asked for support...
Imagine these scenarios:
1) Taxpayer claimed $10,000 of mileage deductions in a personal car, but when asked for support replied, "business driving and stuff."
2) Taxpayer claimed $7,893 of mileage deductions in a personal car. When asked for support...
...took me to glove box of his truck and produced a mileage log with dates, miles driven, and a description of each trip. (This could also be an app on your phone.)
Have receipts of invoices for major purchases or large categories of small purchases.
Have receipts of invoices for major purchases or large categories of small purchases.
None of this has to be fancy, just organized!
It doesn't have to be in paper. Electronic is fine.
Just in general, have a system that is easy for an auditor to understand.
Keep these records for 7 years. It's not hard if they are electronic, but back them up!
It doesn't have to be in paper. Electronic is fine.
Just in general, have a system that is easy for an auditor to understand.
Keep these records for 7 years. It's not hard if they are electronic, but back them up!
Step 4 - Be prompt!
When most people get a letter from a tax authority, they put in back in the envelope and wait until it is due.
Call someone right away that knows how to handle it.
I'm free to Money Twitter. If the IRS comes knocking, ping me right away. Don't wait!
When most people get a letter from a tax authority, they put in back in the envelope and wait until it is due.
Call someone right away that knows how to handle it.
I'm free to Money Twitter. If the IRS comes knocking, ping me right away. Don't wait!
In Summary, if you were an auditor, who would get a better audit?:
1) Someone who could explain their taxes (or hired someone who could), that had good books, good records, and was prompt.
OR
2) Someone who didn't understand their taxes, had no books and records, and was late?
1) Someone who could explain their taxes (or hired someone who could), that had good books, good records, and was prompt.
OR
2) Someone who didn't understand their taxes, had no books and records, and was late?
Be prepared and avoid a NASTY tax assessment that you don't need.
It's actually pretty easy if you follow my four steps.
If you found value in this, please RT to your friends. I would love to help them all.
It's actually pretty easy if you follow my four steps.
If you found value in this, please RT to your friends. I would love to help them all.
