What Audit Questions Will the IRS Ask to Determine if you Have an Online Business?

If you come under audit because of online transactions or business activities or if you face a broad audit, it is highly likely that IRS agents will ask you about online business activities. While many taxpayers believe that they will be able to dodge the issue, the fact of the matter is that IRS agents will work multiple angles until they can confirm or deny that activities of this type are ongoing. That said, taxpayers who prepare diligently for an audit may be able to explain certain inconsistencies and avoid all or some penalties and fines.

Are You Ready to Answer the IRS’s Online Business Tax Inquiries?

To start, the auditor is likely to directly ask you if you have a business website. However, don’t expect the auditor to take your word for it. Agents from the IRS understand that businesses need to market themselves and will search for websites through Google and other search engines. The agents will engage in additional measures to check for the existence of a business including checking with domain registrars, looking for tax deductions related to business development, and checking traditional advertising methods like the Yellow pages.

These efforts capture only the tip of the enforcement iceberg. The agent will also ask other probing questions about your activities including:

  • What products do you sell?
  • Whether you conduct Internet business?
  • What records do you keep?
  • What domain names do you have registered and their current use?
  • How many employees are engaged in web activities?
  • Do you accept credit card payments? Have you accepted credit cards online?
  • Who is your ISP?
  • Does your financial institution or bank process online payments?
  • Do you ship products and what shipping companies are used?

The IRS agent will collect information from these and other inquiries. They may then choose to verify what you told the agent with third-party information. In certain circumstances, the IRS may even subpoena the third party for records. If the IRS catches you in a lie regarding your business, expect the audit to proceed to the next level which may even include referral for criminal tax charges. Therefore, it is often prudent to have a tax lawyer handle the stress of the audit. He or she can set ground rules and work to guide your case through the audit process.