Best Business Practices for Photographers [103]
The document request went on to require vehicle expenses, contract labor, depreciation, supplies, and business use of home, and it left the door open for any other items with the broadly worded "the above items are requested in setting a scope for the examination. Additional information may be requested at a later time."
Essentially, this was not a spot check on a few items on a return. This was a full-blown, "we want to see everything" audit.
After a trying two weeks, I delivered all of the required documentation to my accountant on the 29th, the day before the audit was to begin. I asked my accountant how long he expected the auditor would be on hand looking at my tax records, and he surmised that it would be at least two days, given everything she had to look through. At the requisite hour on the 30th when the examiner was to arrive at my accountant's office, where the examination of my records was to take place, my accountant received a phone call rescheduling the appointment for January 13th. So, I spent my New Year's Eve contemplating the examination and trying to read the tea leaves into what the rescheduling might mean. (Answer: nothing.) On January 13, the examiner arrived, and my accountant gave her a cursory overview of the records and left her to her examination. At the end of the day, a Monday, she stated to him that she would come back, she would be selecting items on the returns to spot check, she would provide a list of items she wanted to see receipts and other supporting documents for, and she would provide that list by the end of the week. The beginning of the following week, the list had not arrived, and a call to the examiner revealed that she wanted to see the general ledger for the business, and she would select a series of expense items from that and ask for receipts proving the business purpose for each.
Thus, an audit of an entire two years of business income and expense—every single item was reduced to a spot check of a selection of items. My accountant commented to me that it was the extreme organization of my tax records and their presentation with attention to detail that gave the examiner the impression that we had our act together and everything was in order. During our meeting, he said that some people being audited get angry, dump a disorganized pile of receipts before the examiner, and say something flippant like, "All the receipts are there. Feel free to find them." This, he said (and I wholeheartedly agree), is the fastest way to antagonize the examiner, who will then approach your audit with vigor and zeal. The first rule of being audited is to avoid upsetting or antagonizing the examiner.
Starting Off on the Right Foot
So, with your first priority actually being to not upset the examiner, you must still ensure that your rights are respected, and you, dear layperson, have no clue what all your rights as a taxpayer are. Your accountant or a tax lawyer does.
When you first get your accountant on board, one of the first things he or she will tell you is this simple fact: The IRS has come to you and is doing an examination of your returns to get more money. This should not come as a surprise, nor should you take offense. It is a fact, and the faster you get over it, the better off you will be. Approximately 25 percent of all IRS employees, both permanent and seasonal, are examiners, and getting