IRS Tax Audit Manual for Artists and Art Galleries
No doubt, you are in the business of surrounding yourself with beauty. Chances are you are an artist, a gallery owner or both. If you think that because you own a “niche” business that the IRS doesn’t understand your particular business requirements and your cash flow, you could find yourself in serious trouble when faced with an IRS tax audit.
The IRS Tax Auditor knows the difference between an oil painting and an acrylic. They will also understand the difference between a piece of art done in abstract style or cubism. When an IRS Tax Auditor visits you, the biggest problem you will be facing is that the IRS Tax Auditor views his or her work only in a style that can best be described as realism.
The books and records that should be found in a gallery are the basic ones found in any industry. Larger galleries will probably have records on computer such as journals, ledgers, inventory records, and check disbursements. Smaller galleries may still use manual systems.
The secret to a successful art gallery that the IRS knows, but you probably don’t!
Gallery owners are the key to the business. Are they experienced artists themselves, collectors turned salesmen, or merely entrepreneurs trying to make a profit? The more knowledgeable the gallery owner is about the artwork, the clientele, and the market, the better the business will function.
While looking at the industry, there were many galleries that were competing side by side with nearly the same type of art, at about the same prices – one would fail and one would succeed. The difference appears to be the owner of the business and his or her working knowledge of the industry. This one factor seems to determine the overall strength of the business.
Typical areas of concerns would include:
- Do you issue/receive 1099’s for artwork that is purchased or sold on consignment?
- Do you supply merchandise to trading posts?
- Do you sell strictly on consignment or do you own the artwork that you are selling?
- Did you know that a gallery owner is REQUIRED to be present at an IRS audit?
- Do you ever pay an artist in cash?
- Do you understand the term passive loss?
- Do you pay commissions to brokers or agents?
- Do you purchase items such as jewelry or pottery from walk-in vendors?
- Do you trade your inventory with other galleries?
- And there are many more!
If you don’t understand how the answers to these questions can affect your tax liability, you could find yourself in trouble with the Internal Revenue Service. How can the IRS possibly understand the business of an artist or art gallery? They have done their research! Now it’s time to do yours. For a small investment you can do yourself and your business a huge favor by reserving this invaluable manual for your own pro-active use NOW.
TABLE OF CONTENTS
- CHAPTER 1: INTRODUCTION
- General Description of the Industry 1-1
- Industry Description and Characteristics 1-2
- Common Characteristics of the Industry 1-3
- CHAPTER 2: METHODOLOGY
- Artists 2-1
- Art Galleries 2-3
- CHAPTER 3: EXAMINATION TECHNIQUES
- Background 3-1
- Pre-Audit Considerations 3-1
- Initial Interview 3-2
- Information Document Request 3-2
- Typical Books and Records 3-3
- Required Filing Checks 3-4
- Audit Procedures 3-5
- Income 3-5
- Cost of Goods Sold 3-5
- Expenses 3-5
- CHAPTER 4: AUDIT ISSUES
- Trades 4-1
- Inventory 4-2
- Other Areas 4-4
- Trading Posts
- Acquisitions of Inventory 4-4
- Emerging Issue 4-5
- Art Advisory Panel – IRM 42(16)4.1 4-6
- GLOSSARY G-1