# Going through a small business Audit



## sunnydayz

There are a lot of myths about what is a tax write off and what is not. I just got done being audited so I thought I would write a small article of my experience in the hopes to help others. 

When I received the letter from the IRS I knew I had a lot of work to do to prepare. There are 2 different type of audits. The first is the one where they send you a list of items they would like to see, and you send them in, they then review them. The second type is the one I received. It is a very detailed audit. They send you several pages of items they would like to see, and you have to bring all of them in person. They then scheduled 4 hours for our audit, to review every little thing, and decide whether the deductions were acceptable or not.

Now I want to say here, do not ever try to get out of an audit. It doesn't work and only makes them pay closer attention to your case. We were scheduled for our audit to be held quite a distance from our house, so we requested a closer location. This was denied and we moved on to prepare.

We went through all of our records till we felt we had everything in order and headed down with our tax attorney to our appt.. Now I had thought there were rules that had to be followed and that your deductions fit into the categories and those rules are followed. This is not really the case. It is up to each auditor to decide what is expectable or not. If they do not feel that a deduction is ok, they will deny it. Then your tax attorney will negotiate an amount that is acceptable to the agent.

This is pretty much how each record is gone through, with negotiations back and forth, till a some what common ground it met. I will list some things that I thought were perfectly legitimate, that I found were not.

I had written off a portion of my rent, since I am a home based business. The auditor accepted part of that deduction but not all of it. He advised that if I would have taken pictured of my space I was using, he would have given my the full amount I had written off. But because I did not and I was no longer at that location, he would only give me a small portion of that deduction. I only got the lower amount because my attorney negotiated to get it. 

So tip #1 : Take pictured of your work space, all of your equipment and all of your stock.

Another one that was not fully excepted ( and I read about this issue on a regular basis in the forum) is charitable donation. I donate items on a regular basis to charities. I will be honest and say that I didn't keep the best records of this, but I felt by showing receipts of things purchased and receipt from the person I was donating to, I would have no problem proving this. Long story short, unless my donations were made to a registered non profit, with a receipt showing their registration number, a signature from the person running that org. and a detailed list and value, they were not tax deductible. I had receipts from non profits that were not signed so they were denied.

Tip #2: Always when making a donation, make sure it is a registered non-profit org, with registration number. and you get a detailed receipt showing what you donated, what the value was and make sure it has a signature from a representative of that organization.

Then we moved on to utilities. Most of what I wrote off for utilities was accepted, except a portion of the phone bill. If you use your business phone for any calls that do not have to do with business, they can choose to not accept that write off. Another negotiation by my attorney got me a portion of the phone bill deduction. The reason he reduced the amount was that while my daughter was on vacation, she had called my business phone and talked to me, and the IRS agent caught these calls, because they do look at all of your phone bills and the calls that are made, and asked why they were on my business phone.

Tip #3 Try to keep all business calls on business phones, and personal calls on personal phones. It really would have made it less complicated for me if I had done this.

With my business mileage, I was good  I got the complete deduction on this one. There are 2 different ways you can write off your gas. One is to keep all gas receipts and then they give you a portion of what you put in gas. The other is to keep track of your mileage per day, and log where you drive. I did the second method as it is just easier for me to log it each day. This was very important that I had this info for the agent.

Tip #4 Log all travel expense with a mileage and destination.

Also I thought my lease for my vehicle was totally deductible but according to my IRS agent, only a percentage was acceptable, again my attorney negotiated that amount. But that was fine.

All of my business supplies were accepted as I had kept detailed records of every little thing I had bought for my business. So I had no problem there.

Every deduction that was reduced was done by a percentage, like if it 100%, he would reduce it to 20% or 30%. He never reduced a deduction by an actual dollar value, only by percentage.

So in the end, I ended up owing $4305.00 above what I had filed on my taxes. Now I had the right to appeal this decision and was told that it would not be a problem if I did not agree with it. I was then told that if I appealed it, they had the choice also to request my last seven years to also be audited. Now this is where I what I stated above comes into play, If you appeal it, then they will apply the rules as they are written, but do you want to go through seven more years? My outcome? I just paid them and it was over with  I have no doubt that I would not have a problem with doing the seven years, but the time it would take would be too much for me.

What I can say after this experience is that to always make sure you have detailed records. In fact you cannot be too detailed as far I am concerned. Make sure when you are taking a deduction that it can be backed up 100%. 

When I left my appointment and we were done, I was told to expect to see them again within the next couple of years. The reason for this is that audits are being increased where small business is concerned, and that it will be increased more within the next couple of years. They said that if you are a small business, you can be expected to be audited every 2 to 5 years. 

I was not audited for any reason, its like a lottery the way it works. The way it works now is that their system randomly selects audits every certain amounts of filings. So it was the luck of the draw that I was picked. There was no trigger that called me to their attention. It just works the way it does, randomly  So be prepared every year as it will protect you.


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## out da box

Wow! Now I'm really scared, already owe.


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## reginammp62

Unbelieveable. Quite scarey! Oy! I'm now having second thoughts for the 11th time! 
-regina


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## billm75

Thanks for sharing your experience. I really appreciate the inside info. 

I guess I better get some really good record books and folders going for my biz. UGH.


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## sunnydayz

I posted this in hopes that it will help people to be prepared more then I was  I hope that my experience and the tips that I learned will help someone else.


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## binki

the irs are bullies. take a tax attorney with you as well.


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## sunnydayz

Yep I did take one with me  I guess it could have been worse. I also wanted to clarify that my audit was not for last year. They actually audited me for 2005. So having to go back a couple years and organizing everything was alot more work then if I were to have do last years, as I would have had all of that paperwork right at hand. Now I have learned to keep everything organized and filed for each year. After my audit I made sure to make sure my other previous year before and up to now is filed correctly. 

That was something I left out of my article. Because they audited for 2005, they have you bring the year previous, which was 2004 and the year following, which was 2006. So I actually had to bring 3 years of records with me.


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## Teeser

I saw you post about this earlier this year. I'm glad your ordeal is over - for now. I don't like how they threatened you with another audit. Why don't they go after the big corporations that owe millions? 4K is a drop in the bucket. It must have been nerve wracking. Every time I get my quarterly tax forms that say IRS I break out in a cold sweat! My records aren't that great. I might just ask what the total is and send a check to avoid it. 

Did the original letter give you any indication of the amount? Or did they leave you totally in the dark for 6 weeks?

Did the total include penalties?

Did you use an accountant to file your income taxes?


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## Tizz

Thanks for sharing your experience with us! I'm sure we all would benefit from this. 

Regards


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## sunnydayz

Teeser said:


> I saw you post about this earlier this year. I'm glad your ordeal is over - for now. I don't like how they threatened you with another audit. Why don't they go after the big corporations that owe millions? 4K is a drop in the bucket. It must have been nerve wracking. Every time I get my quarterly tax forms that say IRS I break out in a cold sweat! My records aren't that great. I might just ask what the total is and send a check to avoid it.
> 
> Did the original letter give you any indication of the amount? Or did they leave you totally in the dark for 6 weeks?
> 
> Did the total include penalties?
> 
> Did you use an accountant to file your income taxes?


When I recieved my audit papers they came by themselves in a very thick envelope, so I kinda knew what they were before I even opened it  I asked about the why small business instead of large business, and I was told that because they have lawyers on staff it takes to long, so instead they do a ton of small business audits.

They do not give you any indication of what you will or will not owe, they even state that you may get money back, and in a few areas my deduction was actually more then I took, so those areas were adjusted up. Basically when you go in, they dont really pay attention to what you did on your taxes, they start from scratch like doing your taxes all over, then the compare and adjust to your taxes you filed.

The amount I paid was including penalties. Because I paid it right away there was no interest added, other then the interest they charged me for the time from 2005 to now, yes they did charge me interest on the amount for those 3 years, that was included in the total I stated above 

I did take an accountant/tax attorney with me and it was good that I did so he was able to negotiate the amounts.


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## DAGuide

BobbieLee,<O</O
<O</O

I went through the same process (including having to drive 2.5 hours to meet with them since the tax year in question was in a different city then where I am currently living). I had a friend of mine from grad school doing my taxes and he made some major mistakes. Between my new accountant and me, we were able to get out of any penalties and got IRS' findings of $9,000+ down to basically the same amount as you paid including interest.<O</O
<O</O

It was definitely a lesson to remember. Now, I try to keep all business expenses to specific credit cards because of the paper trail. I even own Neat Receipts (it scans in your receipts and IRS takes this as a valid copy) because some of the ink on receipts vanishes over time. It is a major pain trying to determine what a receipt was for when the ink vanished let alone convincing IRS that it is a valid expense. 

<O</OGlad to hear you are done with it.<O</O
<O</O

Mark


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## Teeser

DAGuide said:


> It was definitely a lesson to remember. Now, I try to keep all business expenses to specific credit cards because of the paper trail.


So they will take cc STATEMENTS as legit receipts? I'm saved! I never have cash I'm going to go download everything.


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## drummerstar

Thanks for the info. Great Post!!


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## prometheus

Sorry about the audit, but thanks for sharing BobbieLee.


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## Girlzndollz

BobbieLee, awesome post, thanks for opening up and sharing what happened. Thank you. BobbieLee, did the accountant, or do you, recommend any software for helping to track everything? Did QuickBooks come up? Thanks so much... -Kel


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## XYLisa

BobbieLee I'm glad this is over for you and glad the damage wasn't worse.....hope you're feeling better


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## NoXid

Wow! What an experience. Thanks so much for sharing this. It's sort of a "scared straight" for lazy tax filers. Looks like I better up my game a bit.


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## charles95405

FYI this thread is over 5 years old


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## NoXid

charles95405 said:


> FYI this thread is over 5 years old


I do believe that the IRS still exists, so the worth of this thread is in no way diminished by the passing of a few years. Hell, they would audit records older than this thread!


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## charles95405

There have been some changes in IRS procedures, some good some not. So best to check with your accountant


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