While many people start online companies and e-businesses with the best intentions and an earnest desire to succeed, the IRS tends to view such business ventures with suspicion. If you happen to lose money for several years or have an online business that has yet to turn a profit, the IRS may place even greater focus and attention on this aspect of your audit. Since the IRS seems to believe that online businesses present an opportunity for tax fraud and tax evasion, it is essential for online business owners to keep accurate and complete records.
The IRS is aware that tax fraud occurs in business establishments of all types. The IRS also recognizes that online businesses can engage in many of the same types of fraud that brick and mortar along with new types of fraud due to the electronic nature of the company’s records. For instance, the IRS and California state tax agencies have already identified “zappers” and other devices that allow a company to alter their records as a major cause for concern. Furthermore, the IRS recognizes that many point of sale solutions for online businesses allow editing and alterations to the sales records. By altering sales records businesses can reduce taxable income.
The IRS also recognizes the potential for fraud in the fact that the business is actually a tax shelter. For example, the IRS is aware of the popularity for online businesses to use an LLCs for grantor trust partners thereby creating a TEFRA partnership at the LLC level without filing corresponding 1040s. The IRS is also aware of taxpayers who may run a “business” out of their garage that loses money every year. They may come to believe that this “business” is actually a scheme to reduce the taxpayer’s taxable income.
In other circumstances, the IRS may come to believe that your online business is actually a tax shelter because you failed to disclose its existence or made other inconsistent statements regarding its existence or operations. Taxpayers need to be extremely carefully regarding the statements they make to an auditor. Even innocent mistakes or statements made in jest can be misinterpreted and lead to major tax headaches. Therefore, it is often prudent to work with a tax attorney who can set ground rules for the audit and ensure that all aspects of the audit are addressed diligently and professionally.