New to SmallBizSurvival.com? Take the Guided Tour. Like what you see? Get our updates.

IR-2012-84, Nov. 2, 2012

]]> 96 https://smallbizsurvival.com/2012/10/irs-will-begin-to-look-closely-at-e.html Wed, 03 Oct 2012 10:30:00 +0000 http://smallbizsurvival.com/?p=103

Money you make online will be scrutinized more carefully by the IRS. Photo by Becky McCray.

The IRS’ interest in this area is part of its compliance efforts aimed at closing the tax gap, which is the difference between taxes owed and taxes actually paid. Small businesses are among the largest contributors to the $450 billion a year tax gap, and as they increasingly do business online, the IRS has become more interested. 

• Online sales and customer payments for goods and services
• Advertising income
• Internet auctions and bartering
• Online “tip jars” used by visitors to support websites
• Sale of customer lists
• Referral fees from list sharing

Compliance tools 
Last year, Congress gave the IRS more information statements aimed at helping with e-commerce underreporting – namely, Form 1099-K, merchant card and third-party network payment reporting. These reporting requirements are aimed at businesses that conduct e-commerce through credit and debit card payments and third-party network payment providers, such as PayPal. The resulting Forms 1099-K will be a cornerstone to a future business income-matching program that does not exist today.

In addition, last year, the IRS completed a significant update to its Internal Revenue Manual audit procedures, and many of the changes focus on unreported income in e-commerce activity. The IRS added instructions for auditors on how to examine businesses with e-commerce activities, including several techniques to question whether all income is reported on a tax return and additional guidance on audit trails to pursue. Agents are instructed to:

• Reconcile merchant card payments to bank deposits, books and records, and the tax return.
• Investigate website traffic and volume that could be indicative of a high volume of business.
• Review websites for historical activity.

IRS agents may now ask these questions in their examinations:*

• Do you do business online?
• What payment methods are accepted through your website?
• What products, services and other items can be purchased on your website or through email marketing?
• What websites do you own? How do you account for income from each website on your return?
• Do you sell advertising on the Internet?
• Do you sell products and services through other online providers?
• Do you sell products and services from other business partners?
• Does your site make sales to customers in foreign countries?

What’s next?
In the next several years, expect the IRS to look closer into e-commerce as a comprehensive strategy to address small business noncompliance and narrow the largest segment of the tax gap. The IRS thinks that there is substantial noncompliance in the following e-commerce areas, which it will target in compliance initiatives going forward:

• Unreported income on sales of goods, including sales from home-based online businesses
• Unreported income on the sale of appreciable assets, such as collectibles and antiques
• Offshore activity, including unreported income from foreign customers
• Abuse of the home office deduction
• Abusive home-based business tax avoidance schemes that deduct personal, living or family expenses
• Internet businesses that generate losses but are actually hobbies

Prevention is always best:  Prepare a complete and accurate return. Do what the IRS agents are instructed to do before an audit and closely review and reconcile your small business income, including any Forms 1099-K received. 

[This post was inspired by an article that originally appeared at the Beyond415 Knowledge Center.]

Can you still claim business expenses on your taxes if you’re a blog contributor and the website can’t pay you yet because it’s just barely profitable?

This answer assumes that you live and practice your profession in the United States.

Bloggers networking at SXSW 2009

If you practice “blog contributing” as a business, then any and all ordinary and necessary expenses connected with that business would be deductible.

If you already have an established business, then the fact that you have this one client who does not pay is of little consequence. There is simply less income to report. However, the amount of “income” that you failed to receive is NEVER an expense item. You simply have no income to report for that client.

If you only have the one, non-paying client, then the trick is figuring out if you are actually in business as a blogger or if it is more in the nature of a hobby. Hobby expenses are NOT deductible. With time and working at the process, a hobby can be turned into a true business in the eyes of the IRS. Dot the “i’s” and cross the “t’s.”

Several things would go into determining whether or not you have, in the words of the IRS, “a business motive.” The following is not an all-inclusive list:

• Do you have other clients who do pay? Or is the non-paying client your ONLY client?
• Do you have a business plan? 
• Do you maintain a separate business checking account for you business?
• If one is required, is your business licensed by the local or state or federal agencies?
• Do you advertise your business? Does your blogging business have a web presence?
• Do you have business cards? Pre-printed invoices? Business stationery?
• Do you attend networking events in an effort to gain new clients? i.e., SXSW?

The IRS has some very good resources to help with this kind of decision.

With some pride, I tell you that my hometown owns and runs a very excellent retirement community for the people who can still live independently. It is called the Homestead Retirement Community.

Since the economic downturn, our little town has been seeking ways to cut costs. Some short sighted people have been campaigning to sell The Homestead. They want to take it out of the public sector (where it is run for the good of the occupants and the community) and sell it to some for-profit corporation or LLC (which must, because that is the duty of a for-profit group, run it with the sole desired outcome of making money–as much as possible). Now, the City Fathers have actually taken that very, fateful step: the Homestead is for sale.

So, being me, I dragged out my soap box, dusted it off, climbed aboard, sharpened my “pen” and fired off a letter to my local paper.

I think it is horrendous that the City is trying to sell the Homestead.

It may be “good business” but it creates a lousy perception of what “society” (as in the social fabric of the community) is in Alva!

If memory serves me correctly, Alva voted for the Homestead because there was a lack of adult living space for those citizens who were not in need of rest home care but who were concerned to keep living alone. [I have, since this letter was published in the local paper, been set straight by a very highly placed source: “citizens did not vote; there was a survey with overwhelming positive results.”]

The creation of such a facility in Alva would enhance the community. It would show that the people of Alva valued ALL members of the community. It would allow more people to stay active in Alva, longer. It was to be a contract Alva made with its citizens.

Enid, Wichita, Oklahoma City [all places considered within driving distance] offered the type of facility that the Homestead became, but they require a BIG buy-in that is forfeited when the residents moved out. In addition, those other places are not Alva and Alva residents are in Alva because they want to be–their friends are here, their church is here.

I have taken several of my friends from out of town to see the Homestead. People from the Dallas-Ft Worth Metroplex, the Boston area, the Denver locale, the San Francisco region, all rave about how wonderful the place is. When I tell them there is no buy-in they all really do a double take in amazement. They bemoan the fact that there is nothing similar in their own geographic area or in the area where their aging parents live.

Alva could certainly do a better job of advertising the Homestead. Also, if residents could bring their pet–say one small dog or one cat or one bird–more would move to the Homestead earlier, at a younger age. Someone bringing a pet could pay more of a “cleaning deposit” than others; they could pay a little more each month for the pet. I am sure some set of rules could be worked out.

I really, firmly believe that Alva should re-think this business of selling such a fantastic asset as the Homestead. Finally, since the oil and gas boom has come to town, surely Alva can find the money to continue offering this jewel to our older citizens.

I have received some emails in response to my blog bemoaning the selling of the Homestead. I thought you might be interested.

While neither of these people are residents of Alva, they did get a very positive impression of Alva just from seeing the Homestead. I fear by selling, Alva not only loses a great community asset, but also gains some very negative opinion around the area.

I am going to leave-off the names as I have not asked and these people have not given me permission to use their names.

Dallas-Ft Worth Metroplex:

Holy S***!  I love that place.  When you took [my son] and I there, it was amazing.  I am so mad too!  Why can’t people just live without thinking they need to make more money!

Greater St. Louis Area:

So…Tell me what is happening now with Homestead? What is happening locally to keep it going…? PETS are a must-have. The folks sit there languishing in their homes, yet their pets give them pleasure, make life worth living, give them a companion.