I Survived an IRS Audit (and You Can Too)

by Stephanie Chandler

Although I read the letter three times, the grim news stayed the same: 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.

 “You have nothing to worry about,” my accountant assured me. “We have everything in order.” Because I have a broad spectrum of activities on my plate—I own two businesses, I’m a published writer, and I also work as a business consultant—I have relied on an accountant to keep my books since I began my entrepreneurial life in 2003.

The letter indicated that I needed to bring several items to the audit, including bank statements, credit card statements, the prior year’s tax return, and charitable contribution receipts. To my great 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 for me to locate everything I needed.

I put the appointment out of my mind until the day before, and then the nerves set in. Although I kept reminding myself that there was no reason to worry, I couldn’t ignore the knot forming in my gut.

As we rode together to the appointment, my accountant said that the IRS was increasing the number of random audits it performs and that, unfortunately, another client was facing her third meeting with an auditor. During her first meeting the auditor had 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 analyze her receipts further.

Thank Goodness for Good Files

My appointment was scheduled to last a whopping four hours—standard operating procedure, I was told. 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 tax return in front of her, she asked to see a detailed report of expenses. My accountant handed over a printout from QuickBooks.

As the auditor reviewed the details, she periodically pointed to an expense and asked to see it on the associated credit card statement. My accountant had all my statements filed by date in a binder, so she was able to flip through and point at each line item when asked. This impressed the auditor, who said 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. She said that I would receive a letter stating the same and that I was cleared to leave.

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 my records are adequate. If you’re ever faced with the same challenge, here are some things you can do to prepare:

Keep your business and personal finances completely separate. Don’t use any bank account or any credit card for both.

It can 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 figures consistent. During the spot-check process, the IRS is looking for patterns and deviations from them. If you show a consistent pattern with your expenses, further investigation is unlikely. But if, for example, you travel an average of 150 miles each month for business, then a month in which you claim 700 miles will get attention. Be sure you can justify such dramatic differences.

Get and hang on to receipts for donations your business makes to charities. New regulations require receipts for all charitable donations.

If you or your business 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; ultimately it’s your responsibility.

Place a reasonable resale value on donated items. The IRS agent I dealt with suggested using what the item would sell for at a garage sale and referring to a chart of prices provided by the Salvation Army, which you can access at www.salvationarmyusa.org.

Find out what records your accountant maintains. Ideally, the accountant will keep copies of all of your statements in an orderly fashion.

Most important of all, make sure your own records are in order. Filing statements by year in folders or a binder 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 the auditor finds an error, the worst-case scenario probably won’t be so bad. In most cases, minor errors simply mean that you owe some additional money. And an error could also be in your favor—you could end up getting some money back!

Stephanie Chandler, the author of From Entrepreneur to Infopreneur: Make Money with Books, E-Books and Information Products, is the founder of www.BusinessInfoGuide.com, a directory of resources for entrepreneurs; and of www.ProPublishingServices.com, a custom writing business that specializes in electronic newsletters.