What does an IRS audit look like?!
Getting audited can be really scary!
But here’s the thing - it doesn’t have to be.
All an audit does is verify that what you self reported to the IRS through your tax return is supported by your documents and receipts.
Even if you paid someone to put your return together, it's still considered 'self reported'.
Thursday I went to an IRS audit appointment with my newest client.
Now, I'm not a licensed tax preparer and I did not put her return together but with having spent time working in an accounting firm that was generous with sharing knowledge - I know a thing or two.
I'd also like to stipulate that my client is generous and granted me permission to share this story in hopes to help other small business owners. So after reading this post - comment below with your thoughts, questions or maybe your own experiences!
The more we talk about it, the more it will lose that overwhelming fear that most feel because you'll be educated and know your covered.
How it went
The IRS agent was really nice, patient and helpful.
My clients business is always on the road so unfortunately she missed the first scheduled meeting.
Now here's the beautiful thing → she didn't let that overwhelm her or allow that to bury her, she called the agent, explained the situation and simply rescheduled the appointment.
BAM!
Don't let fear get in your way - always ask the question and lead with honesty and vulnerability. Most of the time it'll get you further than you think, my friend.
Anywho, we go to the appointment and the agent laid out what the process was going to look like for my client and what to expect.
She was very clear and direct yet welcoming.
She laid out the three potential outcomes:
We give her all the supporting documents that match exactly to what was reported on the tax return and she reports a no change
We give her supporting documents that accumulates to more than what was reported on the tax return and she reports a refund to be issued
We cannot give her enough supporting documents that matches exactly to what was reported on the tax return and she issues a change that means more taxes owed
She then showed us the tax payers bill of rights and the options available to my client in the event she doesn't agree with the outcome of the report issued by the IRS agent.
Really not scary right?!
I found it very helpful and informative, overall.
What made my heart sing was when the agent said something along the lines of "I'm here to educate and uplift you with any gaps in knowledge that may be present and answer all of your questions without judgement"
Through the entire meeting, she made sure to ask multiple times if we had any questions. She was very open, patient and kind with answering all our questions.
There was a specific question the agent asked that my client didn't fully understand and I'm not IN her day to day business enough to have been able to answer it and the agent worked through it until we came to a solution.
What was the meeting about?
Technically this meeting was suppose to be where we gave her all the documents that she asked for; last month the agent had sent out a letter asking for specific line items from the return that she wanted receipts/documents for.
Since my client added up all receipts at year end and didn't have the books together, finding these documents will be a treasure hunt. While I find this fun.. I know most don't see digging through paperwork the same way I do 😂
My client had put together some of them - but it's a big project and she had initially tried to do it all herself which led her to spending a lot of time finding receipts for things the agent wasn't asking for.
Not so subtle reminder that it’s okay to ask for help when you’re out of your element. Being a business owner does NOT mean you have to go at it alone.
So, what happened then?
This is the beautiful part and why you should not fear the IRS.
My client had been in constant communication with the agent over the telephone and was honest about the situation.
Word to the wise - never lie to the IRS.
They know when you're lying, it's generally very obvious, so just don't do it.
This doesn't mean be a well of endless truth telling. This means answer their questions directly and honestly and be upfront about your situation.
Because my client did that, came to the appointment as prepared as she could be, brought me along to show that she's putting an honest foot forward by hiring a third party and treated the agent with the respect she deserves - my client was gifted grace.
We now have two more weeks to find, organize and present supporting documents for the line items the agent wanted to see.
I'm not saying that will be true for every tax payer or every audit - but this has been the experience we're currently going through.
How did you know what documents she was asking for?
When you are selected for an audit, you get a letter in the mail informing you of the audit. In that letter, it outlines exactly what line items on the tax return they want supporting documents for.
They are allowed to ask for every single thing that you reported, but for my client, there were only six categories on the tax return that the agent wanted to verify.
While we're in the audit though, I'm fairly certain she's allowed to expand the scope of the audit and ask for more if she sees a reason to do so.
Since my client is being very forthcoming and honest, I don't anticipate this to happen, but there is that chance.
How do you give her the documents?
For every category she is asking for, my client and I will put together every receipt/bank statement line/statement of accounts we can find to add up and support the amount that was reported.
We will organize it by category with every supporting document behind it, total it up and then go on to the next one.
She said we can email it, mail it or drop it off at the office at the end of the two weeks.
The agent just asked we be as organized as possible so she can seamlessly understand - which is absolutely valid and fair. That helps both parties immeasurably.
Additional notes:
There is about a million dollars in Cost of Labor we need to find verification for. The agent would not accept 1099s as an acceptable form because that is self reported; meaning my client is in full control of what gets reported on the 1099s.
Since my client knows how important correctly reporting 1099s are, finding this million dollars will be the easiest, even though it's the largest category because she keeps all the check stubs which get deposited through banks (third party verification). We just need to organize it, tally it up to double check and then provide the agent with the stubs and tally.
While you're in an audit, you are not "released" from it until your tax account is 100% up to date. Meaning any outstanding issues and all tax returns need to be corrected, up to date and if you owe money you cannot immediately pay, you are on an installment plan.
So unfortunately, my clients 2021 + 2022 tax returns still need to be put together and filed.
The agent has given us a month to do this 😅
Fortunately, this is why my client hired me initially a few months ago before we knew of the audit. She wanted her books together and doing things right. Very proud of her for this!
Which means this massive project is started and my client is even excited to jump in and help!! This really makes me happy because I know once she's in it, she'll get it and it won't be a scary task and she'll seamlessly be able to maintain it.
She's beautifully organized when she isn't avoiding the task.
Going through her office is like a candy store for me with all the post its, highlighters, paper clips, binder clips and beautifully labeled files.
And in her full defense, putting your books together from scratch is not an easy task - if you don't have a foundational understanding, it can get confusing and overwhelming fast.
I truly believe that once I lay the foundation for her.. she's going to take off like a rocket!
Through my experience, this is true for most entrepreneurs.
Setting up the initial system is HARD!
So if you know you’re struggling with this - make sure you’re asking for support. If who you ask does not support you, that’s not a reason to stop asking, it’s just highlighting that they’re not your support system and it’s okay to keep asking.
However, this DOES require you to be vulnerable and honest with where you’re at, which can be difficult.
How can I make sure I'm safe from an audit?
Well, there is rarely a crystal ball saying what selects you for an audit.
There are definitely some things that will flag your account, like excess Meals and Entertainment or the Earned Income Tax Credit, however, I don't want to necessarily focus on that.
I want you to focus on having the knowledge, understanding and foundation for knowing that what you're putting on your books and on your tax return are legally allowable deductions.
Because if you have all your supporting documents and you know that what you claimed is allowable within the confines of the law - an audit won't matter.
It may be inconvenient and a pain the ass. I'm not denying that - but it won't be terrifying and you'll be covered.
What is a supporting document?
Excellent question, my friend!
A supporting document is anything provided from a third party; invoice, check stubs, statement of accounts, receipts, bank statements, received 1099s etc.
How do I know what I'm legally allowed to claim?
I added this question in because I know it's top of mind but every industry is very different and I don't want to give vague or confusing advise.
So, I want you to know that this is an amazing question that if you are unsure about the answer → ask a professional!! Especially one that understands your industry!
Say hey - I want to buy x or I bought y, is this a valid expense?
Don't be afraid to ask, because the more you ask, the more you start to understand the underlying pattern or some of the weird ass laws we have to abide by.
If the professionals answer doesn't make sense to you and it's just not making sense - ask another professional!
Now, I'm by no means advocating for you to shop around until you get an answer you WANT, that can also get you into trouble because ultimately the responsibility of what you submit to the IRS lands squarely on you.. even if you get bad advise.
But it's okay if someone's teaching style doesn't match with your learning style. This is not an area where you can skate by with pretending you understand, even when you don't. Nor should you because your financial data is really important on every level.
So ask the questions, my friend!
In conclusion
While getting audited is never comfortable and I don't want to make it out to be sunshine and rainbows - I will say that my client left the meeting smiling.
That's not to say we don't have a lot of work ahead of us, however, it's not as scary as it had been in her head.
She walked through the fear and showed up to that appointment with her absolute best foot forward and I'm so stinkin proud of her.
She’s doing it and I believe you can too.
Was this helpful? Would you like to know more about this audit journey as we go along? Comment below or send me an email!
Let me know your thoughts or questions!