IRS audit day

 

In the middle of last month we got a pair of thick, hand addressed letters (one to me, one to Robin) from the IRS. We were going to be audited. 

“Everyone's getting these,” our accountant said. “The Seattle office just hired a bunch of new auditors. All my colleagues have someone going through this.”

Today was the day. Luckily, we got a good one. He was a recent college grad, doing this for a year. He had social skills. He was not confrontational. We were nice to him, and he reciprocated.

We spent two hours describing our businesses and our bookkeeping methods. He was willing to speculate why our 2007 return was flagged, which is partly an artifact of the limited information the IRS office has to make its decisions. They don't have the return in hand when they send out an audit notice, just a summary. What made ours stand out were the expenses on our two rental houses, and my equipment and travel expenses.

He said it was obvious on the return that the house expenses on the Schedule E were well within reason. The summary figure didn't detect that we had two houses, and it included the mortgage interest, which adds some big numbers to the total. He spent little time verifying that part of the return. My travel expenses were easy to justify and completely documented, even though they were over $20,000 that year. I am careful to separate business and personal travel, and in fact I had another $6,000 of travel that I didn't claim. Equipment—well, pro photographers go through a lot of gear. I buy a lot less than many of my colleagues. 

We were told to set aside two days for the audit. He finished in a day, largely because we were so organized. “I'm not seeing any problems in the 1040,” he said. “The income matches the bank statements, and the expenses are reasonable.” During the day we uncovered a mistake in my spreadsheet—some empty cells in a formula column—and I was able to add another grand to my travel expense deduction. 

The one hit, however, is to Robin regarding payments to her consultants. She didn't issue them 1099's. No psychotherapist does. No one knows that they have to. This is a completely unknown issue in her profession. We'll have to pay a relatively modest fine for that oversight.

It's been educational. Tomorrow I'll write a post on how to audit-proof your bookkeeping. 

Comments

[Jeff H]

Thanks for sharing. I have not had the experience of being audited yet, but your summary eases my mind a bit. My takeaway is that as long as you are honest and keep good records, you should have nothing to worry about.

[Mariette]

Congratulations!
Good recordkeeping gets its rewards!

[romanlily]

Glad to hear that things went so smoothly. My impression of audits (mostly picked up through popular culture, never direct experience) is that they tend to go on for days and days, and to require the shedding of many tears and the gnashing of many teeth. I'm glad your experience was smooth.