By Stephanie
Chandler
www.BusinessInfoGuide.com
© 2007
Though I read the letter three times, there
was no mistaking the grim news: I was being summoned to the IRS for an audit.
I had an instant flashback to the third grade when I was called to the principal’s
office. I didn’t know what I had done, but it must have been something bad.
After
a tense conversation with my husband, I called my accountant. “You have nothing
to worry about,” she assured me. “We have everything in order.”
The
letter indicated that I needed to bring several items including bank statements,
credit card statements, the prior year’s tax return, and charitable contribution
receipts. To my great surprise (and relief), my accountant informed me that she
kept copies of all of my statements. I had them too, but mine weren’t exactly
in good order. I subscribe to the “shoebox” method of filing. It would
have taken days to locate everything I needed.
I put the
appointment out of my mind until the day before, and then the nerves set in. Perhaps
it’s human nature to fear the IRS. I kept reminding myself that there was
no reason to worry, but I couldn’t ignore the knot forming in my gut.
I
rode to the appointment with my accountant. She said that the IRS was increasing
the number of random audits it performs. She had another client who was also going
through the process and unfortunately, the client was facing her third meeting
with an auditor. During her first meeting the auditor discovered a rather large
personal expense on her business credit card. That set off all kinds of red flags
and spurred a series of meetings to further analyze her receipts.
My
appointment was scheduled to last a whopping four hours—this is standard
operating procedure. The auditor greeted us just minutes after we arrived. Much
to my surprise, she didn’t look like an ogre that lives under the stairs.
She was a personable woman who was clearly focused on the business at hand yet
not afraid to offer a friendly smile.
We sat down at the
auditor’s desk in a standard office cubicle in the local IRS office. She
asked me a series of questions about my citizenship and related items, and then
launched into the spot checking process. With my 2005 tax return in front of her,
she asked to see a detailed report of expenses. My accountant handed over a print-out
from QuickBooks.
As the auditor reviewed the details, she
would periodically point to an expense and ask to see it on the associated credit
card statement. My accountant had all of my statements filed by date in a binder
so she was able to quickly flip through and point at each line item when asked.
This impressed the auditor and she commented that she wished more clients came
as prepared for these meetings.
After about an hour of spot
checking and answering questions about charitable contributions, the auditor announced
that she would not make any adjustments to my returns. She said that I would receive
a letter stating the same and that I was cleared to go home.
Of
course it was a great relief to survive the audit experience. Now I won’t
worry if I ever get called in again because I know I’m on the right track.
If you’re ever faced with the same fate, here are some things you can do
to prepare:
- Keep your business and personal finances completely separate.
Using separate bank accounts and separate credit cards will keep things clean.
- *It can actually be beneficial to charge most of your business expenses
to a credit card and then pay off the balance each month. This way you have an
organized record of your business expenses.
- Keep your accounting
practices consistent. During the spot check process, the IRS is looking for patterns.
If you’re asked to show an expense and it turns out that it’s for a
personal item, you can count on having to dig even deeper into your records. But
if you show a consistent pattern with your expenses, there won’t be reason
to require further investigation. For example, if you travel an average of 150
miles each month for business, then a month in which you claim 700 miles will
get attention. Make sure you can justify such a dramatic difference.
- New regulations require receipts for all charitable donations—even
for the $10 you drop in the Salvation Army’s collection can during the holidays.
- If you donate goods such as furniture or clothing, your receipt
must state “Received in good condition.” Not all charities are following
this policy so make sure you ask since ultimately it’s your responsibility.
- You are only allowed to place a reasonable resale value on items
that you donate. The IRS agent suggested that it’s best to consider what
the item would sell for at a garage sale. She also uses a chart of prices provided
by the Salvation Army which you can access on their Web site: http://www.salvationarmyusa.org
- Ask your accountant what records she keeps. If you’re
lucky like me, yours will keep copies of all of your statements in an orderly
fashion.
- If your accountant isn’t doing it for you, make
sure your records are in order. Ideally your statements should be filed together
by year either in a folder or a binder. This will save a tremendous amount of
time if you get the audit call.
One last bit of advice:
don’t sweat it. This may be easier said than done, but if you’re following
the law and keeping good records, there is no reason to fear an IRS audit. And
even if this is the case and the auditor finds an error, consider the worst case
scenario. Unless your error amounts to tens of thousands of dollars (which is
unlikely), in most cases minor errors will simply mean that owe some additional
money. And an error could also be in your favor—you could end up getting
some money back!
