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AUDITING THE E-TAILER

September 06, 2005

The IRS has issued its new Retail Industry Audit Technique Guide. The new guide has a chapter addressing the special audit problems of online retailers.

The guide gives examiners some basic pointers - e.g., Google the client, run a "whois" search to see who owns the domain, and the like. It also spells out how they verify electronic payments:

It is important for the examiner to review the taxpayer’s web-pages for E-payment sources such as PayPal, Visa and MasterCard, then tie those sources to the Books and Records and then on to the Tax Return. This is an important audit technique for online retail. Look for those items of income that should be there but are missing. Evidence of an unreported online business can also be found by tracing credit card payments or following up on invoices providers.

The IRS can read your website, and if you have a Paypal button and a Credit Card button to accept payments, the IRS will expect you to be able to show them your Paypal and credit card records.

Any business that operates a website will receive advertising income for banner ads and pop-up ads that appear on their website. Additionally, each time a site visitor clicks onto the ad, another fee is paid to the site owner. Be sure to ask how this income is accounted for. Many times there is a counter on the site that indicates the number of visitors to the site that would give the examiner an idea of the amount of traffic the web site receives. If the examiner can determine the “click-through” rate charged, a good estimate of this income can be made. (Often this rate is between 5 and 10 cents per click.)

Not only are pop-up adds annoying, they interest the IRS. Maybe that's some consolation for when you close the 10 or so pop-up ads that pop up when you accidentally enter some annoying e-tail site.

While some people think internet sales are effectively tax-free income, it's not so. Taxpayers who fail to report internet income are asking for trouble; the IRS does have powerful tools to come after them - and Google isn't the least of them.

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