Many taxpayers seem to believe that the Internet is a black hole where the IRS cannot possibly track their activities. At the same time, they also seem to hold the belief that customers will be able to seek out their company and its goods or services. Thus, taxpayers often create a difficult situation for themselves because if an auditor finds out that the taxpayer has made inconsistent statements, the chances for penalties or tax fraud penalties become much more likely.
Before the auditor even makes contact with you, it is likely that he or she has already visited your website and made a local copy of its content. If you attempt to change your website to minimize the appearance of business activities, the agent will know and may consider this act a sign of fraud. Likewise, if you claim to not have a website the agent will engage in a number of means and steps to determine if this is true. Steps will include checking Google local, searching for your business, obtaining records from domain registrars, using a WHOIS tool to determine the identity of website owners, and other measures.
Aside from these more technical steps, the agent is also likely to engage in old-fashioned investigative work. He or she may contract credit card companies to determine whether your business accepts credit cards for online or brick and mortar purchases. He or she may also contact your bank and financial institutions for similar information. Furthermore, if your company ships good, the agent may contact USPS, UPS, FedEx, or another carrier to determine the scope of your business activities. Finally, the agent may come to your business in person to assess facilities and personnel.
The agent is also likely to analyze the tax records you have previously submitted to the IRS. They may look for certain claimed tax deductions or tax credits relating to an online business. Furthermore, if your business has lost money year-after-year and you have deducted these losses, the IRS may claim that your business is actually a hobby and, therefore, you are not entitled to the deduction.