From the Desk of Lauran Corcoran
Let’s Make Some Noise!
Upon my return from the IRS Nationwide Tax Forum, one important concept that was consistently touched upon in almost every lecture was the importance of “substantiation” by the taxpayer.
What does substantiation mean? For the IRS, substantiation means that the taxpayer has complete records that support every detail reported on their tax return. Hands down, it is the best line of defense for the taxpayer for any audit. Substantiation is crucial for many reasons; it provides accurate records for items like travel, meals & entertainment and vehicle use will likely make the difference of thousands of dollars for the taxpayer if audited.
The concept of substantiation is the foundation for the concept of “making noise.” In order to protect against an IRS attack of IRC 183 “hobby vs. business” classification, substantiation and “making noise” is critical; especially for small businesses, in particular home-based businesses. What does “making noise” mean and what does it have to do with substantiation?
It means to make noises of intent to make a profit. Making noise means showing your intention to make a profit that year (classification= business) versus an expectation or hope to make a profit that year (classification=hobby).
So, how do you make noise to show your intention? Well, we return to the concept of substantiation and see that an intention to make a profit can be established by making noise in the following ways:
-Accurate and Complete Books & Records (substantiation, here it is!)
-Local registration to do business
-Pay local taxes
-Separate bank account and credit card
Substantiation requirements and its relation to penalties and audit defense will be discussed in greater detail in future posts. Stay tuned……..