The Audit Proof Juggler How well would you perform in front of the IRS?
BY MARY JOHNSON

 

You polish your act until it shines. You work hard to develop new clients, to sell your show, and to provide your clients with the best act they've seen in years. But your record keeping system consists of a shoe box tucked under your bed. The passenger seat of your car is littered with faded cash register receipts. You can't remember where you were last Wednesday, let alone where you put the receipts from the hotel.

 

Why be so reckless with your taxes when you're so professional in the other aspects of your career? Spending as little as a 15 minutes a day updating your business records will make a big difference. You'll feel more organized, you may even reduce your tax bill, and most importantly, you'll have the ammunition to survive an audit.

 

According to Consumer Reports magazine, small business owners, especially those who receive a significant amount of income in cash, can expect especially close scrutiny if the IRS man comes to call. During an audit, the burden of proof is on you, the taxpayer. The IRS wins more than 80 percent of all audits, mostly because the average taxpayer keeps lousy records!

 

Worried? Don't panic yet. Statistically, only 2.5 of every 100 small business owners will be audited this year, However, if that shoe box is overflowing, and you're not sure where your past month's receipts and contracts are, it's time to take action. Here are ten tips for making bookkeeping easy, and audit proof!

 

1. Unless you work consistently, and have no other source of income, be prepared to explain why you consider yourself a business rather than a hobby. If the IRS decides you're trying to write of the expenses of your hobby by calling it a business, you'll only be allowed to write off expenses to the amount of income you earn.

 

How can you show that your mini-business is trying to earn a profit? Keep clear, accurate financial records and a booking calendar. Prove that you're actively looking for work as a juggler by keeping a file of news clippings, advertisements, reviews, brochures and business cards. If the IRS is convinced you're trying to make a go of it professionally, they are less likely to stick you with the hobbyist label, even if you operated at a loss.

 

2. Establish a clear paper trail of your income and expenses. If you're maintaining inventory and selling something - such as videos of your act or t-shirts, you'll need professional advice from a tax consultant or CPA. But, if the only income you earn is from your shows, it's fairly easy to set up a system which will allow you to respond quickly to an auditor's inquiries.

 

Keep your calendar up to date, and keep a written contract for every show, The contract should outline the fee, the time and date of the performance and any other contractual obligations, such as an agreement to reimburse travel and hotel expenses. Contracts should be signed by you (or your representative) and the person hiring you. When payment is received, write the check number and date on the contract. If a reimbursement check for expenses is received later, that check number and amount should be noted, too, A photocopy of all checks is helpful, but hand-written records are acceptable, especially if they correspond to bank deposits.

 

Resist the urge to cash a check, even when you urgently need the money. Depositing all checks reflects favorably on you during an audit, because it indicates you are trying to establish a clean paper trail.

 

3. Cash income deserves special attention. If you often work for tips, or receive your payment in cash, the law requires you to maintain a daily record. Whether you use your booking calendar or a separate log really doesn't matter, as long as you're writing the numbers down. Tax fraud is a serious offense. If you are found guilty of intentionally underreporting your income, you are responsible for paying the back taxes, plus interest, plus a fraud penalty of 75 percent of what you failed to pay. You may even end up with a criminal record!

 

4. Keep track of your expenses! Most small business owners lose hundreds, if not thousands of dollars a year, because they're sloppy about the little expenses. Keep your receipts. and make notes on them as you make the purchase. Even if your idea of record keeping is shoveling everything into a shoe box and letting your accountant figure it out, taking 10 seconds to make those notes at the time of purchase will save you from trying to piece together each purchase on April 14.

 

A journal is accepted as a written record of purchases under $25. Personally, I've always found it confusing to keep some receipts and throw others away. So we've gotten in the habit of writing on, and keeping, all of our receipts. Sidebar #1 provides examples of commonly overlooked business expenses.

 

5. Set up an simple system, and use it consistently. The IRS doesn't require you to use any particular format, as long as the records clearly reflect your income and expenses. Most of us hate book­keeping, and would rather be rehearsing. working or reading Juggler's World. However, it is as important and necessary as any of those activities. The key is to organize your files in a way which makes sense to you. Many performers label a series of file folders with the categories the IRS suggests for entertainers (See Box #2 for a list). We've found this system contrary to how we work.

 

At our house it developed into little piles labeled "Needs to be photocopied."

Our system organizes our income and expenses by month. Travel receipts and other receipts for hotels, tolls, etc. are stapled to the contract to which they apply. When the check comes in, we note the number and date of deposit on the contract. These are all kept in an accordion file. Receipts for expenses which don't apply to a single show are kept in the same place.

 

To keep them under control, we attach individual credit card receipts to the bill. Receipts for cash and check purchases are kept in a #10 envelope within the file, and each receipt is labeled with the store name, amount, and item. Our system isn't fancy, but with the help of our computer (See Box #3), we're able to find the back-up paperwork for every source of income and expense in a matter of minutes.