What If Your Home Business Gets Audited?

Someone asked me a question about my post yesterday about home business deductions. First, a clarification. I said your home business must be used “regularly and exclusively” for business. Your home business location must also meet at least one of these qualifications.  It must be:

• Your principal place of business, or
• A place where you meet customers, clients, patients in the course of your business, or
•  A separate structure used for your business, or
• A daycare facility.

So, your home business must meet the “regularly and exclusively” provision and one of those criteria above.

The question: How does the IRS know that you are using this space “regularly and exclusively” ? Good question. If the IRS decides to audit you to see if you are following the rules, it can:

• File an Information Document Request (IDR) for information from your business records.
• Issue a summons to appear before the auditor to answer questions.
• Issue a summons to someone else to testify about their dealings with you, including banks and business associates.
• Issue a summons to you to appear in court and testify about how you use your home office space (and this is the “I swear to tell the truth” kind of testifying)

All of these processes must be followed in a certain specified way and the IRS must let you know what they are doing. You have the right to object.Finally, the IRS can get a court order for an auditor to come to your home to verify your home office deduction. You don’t have to let the auditor in, but they also can disallow the deduction.

In other words, don’t take a chance. Play by the rules. If you want to have your home business space allowed so you can take tax deductions on your business expenses, do it the right way. Get a CPA to help you figure everything out. Playing in the margins doesn’t work well with the IRS.

My disclaimer again: I’m not a tax attorney or tax professional. Get advice if you receive an audit notice.