I opened up my mail one day this past Spring and there it was – an IRS audit notice. It was a little confusing though, because it stated that it was an audit of our 2009 individual return, but there were some questions about 2010. There was also a deadline just a few weeks in the future and a long laundry list of things to pull together.
I’ve represented hundreds of clients in various IRS dealings that have turned out really well. So, theoretically, this should have been a walk in the park for me. But to be honest, I was still nervous.
I knew that the first things I did in the beginning would make all the difference. So, can you guess what I did first?
It wasn’t to call the auditor. It wasn’t to go check my files.
The first thing I did was take the audit notice and especially the list of items that were being requested and compared it against the copies of the Audit Technique Guides (ATG) that I have. ATGs are the auditor handbooks that the IRS auditors use. It gives them the basics for the form letters and list questions that they will ask.
I compared the language in the audit notice with the ATG and discovered that there were probably two main areas on which the audit was going to concentrate. One was something I did that I thought might be a mistake at the time.
It’s a long story, but if you’ve followed me for awhile you know that 2007-2009 were big transformation years for me.
In 2007, a business I cared deeply about fell apart because of a bad partnership. I was hurt deeply by the loss and it took me until 2009 to really figure out how to stage a comeback (and to have the emotional strength to do it.) That’s when I discovered that someone had wrongly used my name to promote his business.
I ended up taking on some clients and fulfilling on the promises he’d made (and taken money for). I didn’t get paid, but I thought it was the best thing to do to stop further damage to my reputation and to stop a possible lawsuit from these guys who had gotten ripped off. In the end, the clients got taken care of and most of them stayed after we did a bunch of unpaid work.
Now this is where I made my tax mistake – I put the temporary business into a Schedule C business. That means it was a Sole Proprietorship. I was so busy trying to take care of the clients that I didn’t take care of my own business.
There was a big loss in 2009. Remember that’s the year where I did a bunch of work that I wasn’t paid for, and so I had a Sole Proprietorship with a loss.
I knew that 1 in 3 Sole Proprietorships are audited and it’s an even bigger red flag if there is a loss.
So, as I expected, one of the audit focuses will be on the Sole Proprietorship. The Audit Technique Guide tells me that I’ll have to prove it’s a business and not a hobby (easy), that all the expenses are legitimate (need to verify by looking at the files, but I’m fairly certain that will be easy) and that I’ve got records to prove all the income for the business is reported.
It’s a pain, but that part of the audit will be easy.
The second focus is looking for income. Our income took a nose dive in 2008 and 2009 because of the business loss and then trying to do the right thing for some clients that got snookered. So I had to prove that we had reported all of our income. Unfortunately, this is the tough type of audit. The auditor is going to want to have copies of all of our bank accounts.
She didn’t ask yet, but I knew the second part of the audit was going to be proving where all the transfer, wires and deposits came from.
I keep good records for my businesses, but didn’t always keep copies of all of my deposit slips for the personal accounts.
After I had reviewed the ATGs and made notes as to where my weaknesses would be and where the records were strong, I called the auditor.
Auditors are trained to ask some very pointed and probing questions during the first phone call. They know that’s when people are most likely to open up on that first call and so they’re ready.
So was I.
During the first call, we established the parameters for the audit, what was important and what wasn’t, moved it from an ‘in person’ audit to a mail/fax audit and extended the deadlines I had to get the information.
We had a couple more calls that clarified the information and one more request for information.
And then, I received the following in the mail:
That’s called a “no change” audit and it’s the best news you can get when it comes to an audit.
It could have gone a whole lot harder, but the pre-audit planning and strategy for that first phone call made all the difference.
If you get an IRS or state audit notice, give us a call FIRST. We can help. Call Richard at 888-592-4769.