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Nothing is more disruptive in business than a visit from the IRS. You can get a letter or they can show up at your door.
It can be a simple audit or a request for more information or something worse. No matter the contact, suddenly you have a whole new set of problems and unknowns.
Example: Marie ran her consulting business from her home. On advice of her accountant, she had set up a home office--a room where she conducted her business. Her home office was where she made calls, installed her computer, maintained her files, and worked every day from 9 to 5 with a few breaks as well as outside visits to clients. When the IRS came calling and requested an audit, everything was in order.
Example: John operated an upscale restaurant. Sometimes, diners paid in cash. When this occurred, John pocketed the money--nothing appeared on the accounts, so he thought he was safe from an IRS audit. When an agent showed up, John opened his books and provided all his records. The agent left and John smiled to himself. Then he was hit with a bill for unpaid back taxes and a stiff fine. When the agent visited, he had counted the tables and the white tablecloths that covered them. Checked against the laundry bills, the agent found that John was serving many more meals than he had accounted for, otherwise there would be no need for the big laundry bills. Food bills also indicated that many more meals were being served than reported.
Example: Joline ran a small gift shop. When customers were ready to pay, she would offer a discount for cash. Many accepted the lower amount and handed Joline cash. By pocketing the cash, Joline lowered her federal and state taxes--both on income and sales taxes. It all fell apart when one of her customers happened to be an IRS agent.
When you don't follow the rules, expect to get caught. Many legitimate ways exist to save on taxes. Legal loopholes and strategies can help you run your business and sleep better at night.
If you don't know how to deal with the IRS, get yourself a good accountant who knows the rules. You need someone who has been dealing with the IRS for many years. Frequently, these people know the rules better than IRS agents. A word or two from them will help you avoid lots of problems in the future.