Best Business Practices for Photographers [102]
Chapter 12 Insights into an IRS Audit
If you are reading this chapter, it is for one of three reasons: 1) you are about to be audited (or you are currently being audited), and you need to know more; 2) you want to avoid being audited and are looking for insights into how to do that; or 3) you want to take some odd pleasure in my audit experience.
Just before the holiday season a year back, an unassuming letter arrived in the mail on November 18. It arrived in duplicate—one for me, one for my wife. It read:
"Your federal return for the period(s) shown above has been selected for examination."
This baker's dozen of words was terrifying for me. Not, I hasten to add, because I had anything to hide, but because of the amount of time I expected would be involved in preparing for the examination, which was identified as for the year 2006. Unfortunately for me, I grossly underestimated how much time would be involved.
I was instructed to contact the examiner within two weeks (by December 1). Of all my instructions, this was the one I did not follow. Instead, my first call was to my accountant. The document also noted "someone may represent you," which was what I chose to do. This is the only sound choice for anyone about to be audited. Even though I am neither an accountant nor a lawyer, I will give you this advice—contact an accountant (preferably the one who completed the return for you) immediately. Your accountant will be objective, has experience doing this, and thus knows the best way to answer auditors' questions. Further, if you are angry, upset, or just want to vent, your accountant will listen and nod his head. It's not that he is necessarily agreeing with you; it's that you're not the first person to vent like that, and your accountant is being kind and listening, knowing you'll be done venting soon—and further, that you are paying him a nice sum per hour to listen.
My accountant made the phone call after the requisite power of attorney documents giving him the authority to represent me were signed, and the process was underway. He phoned the agent a few days before December 1 and left a message. She returned his call on December 2, and they set an appointment for December 30. On December 12, she sent him a letter asking for a lengthy list of items she wanted to examine.
The most significant insight revealed during the December 12 communication from the agent was that she had doubled her request for documentation to not just 2006, but also 2007. So, I was being audited for two years, not one.
Even though we have thorough paperwork and recordkeeping procedures in place, these procedures have evolved over time, and there were receipts that had been misfiled accidentally or were missing. Recognize that my December of that year, from the 12th through the 29th, was not a period spent enjoying the holidays; it was a time spent preparing for the document request.
Figure 12.1
Initial IRS audit letter.
Figure 12.2
Second page of the initial letter from the IRS.
Figure 12.3
Follow-up letter from the IRS.
During my meeting with the accountant a few days into the process, I asked him what to expect and what each of the items meant.
I first asked why it had been expanded from one year to two. He responded that this is not all that uncommon, because if the IRS finds something of question in the year being examined, it is likely it was repeated the following year, so they just ask for two years.
I did not understand, for example, why every bank statement for two-plus years was necessary. My accountant explained that the first thing they do is add up every deposit in every