I.R.S. Actually, its an acronym for the Internal Revenue Service. And for our Non-U.S. readers, please enjoy the fun.
I recently spent December through April undergoing a multiple year audit or our studio’s financials. I want to share some of my experiences with the gang so you can have a smoother time than I did.
1. Save your receipts.
The I.R.S. asked for every purchase we made over $499 since the year 1997. Now, you might be thinking, “I heard that you only need to go back seven years. After that you can shred it.” That leads to my next tip:
2. Rumor, hearsay, and advice from your drinking buddies will not keep you out of trouble with the I.R.S.
In my example, they wanted to look at the year 2004. That allowed them to go back seven years to 1997. (Aha! Now you get it). Had I tossed receipts older than 2002 I would be in a financial hell hole now as they wouldn’t have let me expense those prior items.
3. Learn from Al Capone.
If you’ve seen the movie THE UNTOUCHABLES
, you recall that the U. S. government, unable to catch the notorious gangster on criminal charges, resorted to tax code violations to put the man in jail for the rest of his life. The thing you need to know is that doing something wrong in the past (tax wise) not only makes you financially responsible for what you should have paid them at the time of the error, but you’ll be responsible for penalties, fees, and interest compounded since then! In short, a $500 underpayment can grow into thousands in the blink of an eye. Take this stuff seriously.
4. File your taxes on time.
If you file your taxes on time, you have less of a chance of being audited.
5. The I.R.S. has their eye on recording studios specifically.
We’re not alone. Restaurants, bars, and night clubs are on the list, too. Why? Because the government contends that we do an excessive amount of cash business. They want to make sure that cash income is being reported and taxed.
6. They don’t understand us.
Look, if you have musicians that don’t know how recordings are made, mix engineers that don’t know what mastering is, and managers that don’t know you have to pay studio bills, how much do you think an accountant really understands our business. True quote from a banker who toured my studio: “We would never lend you money. You’re totally irresponsible with your purchases. Look at all these microphones! Why do you need more than one or two microphones?” When I had to explain that same question to our I.R.S. auditor I simply said, “We’re like Mr. Goodwrench, but with sound. If you go to a garage, they have dozens and dozens of wrenches. Microphones are our wrenches.” That made sense to her. But I still had to explain why I purchased what I purchased.
7. Don’t Go it Alone.
If you find that you’re in deep trouble with the I.R.S. remember the tax code is tens of thousands of pages long. No auditor can know all of the rules. You might want to seek legal representation to assist you.
8. A lawyer is not a get out of jail free card.
If you did something wrong, the lawyer might be able to help you get in less trouble, but you’re still going to get in trouble. Where a lawyer can really help is if you didn’t do anything wrong and they’re trying to nail you on stuff you didn’t do. I guess the focus of this tip is: don’t try to cheat the government. You’ll lose.
9. If you get an audit notice you must respond!
I guess 25% of the people that get notices ignore them or get so stressed that they don’t respond. If you don’t respond the I.R.S. is allowed to fill out your forms ON YOUR BEHALF. The fees and penalties will be ten times worse than if you worked with them to resolve the situation.
10. Don’t stress.
I know this sounds impossible, and I failed at this miserably. But as a studio owner you’re going to get audited. (This was actually my second I.R.S. audit. I was audited in 1995, as well). Starting today, spend a few minutes organizing your files and records. Look into financial software. You can even get a free business version of Quick Books from Intuit
. If you’re records and numbers are in line, you should not have anything to fear but the loss of time that will be a part of the audit.
Look, taxes are the price we pay for democracy. If you don’t like it, you’re going to have to find another country. And while some of the readers in the E.U. have different tax rules, WE ALL PAY TAXES. One way or another - we all pay taxes
Tape Op is a bi-monthly magazine devoted to the art of record making.