I survived an audit: What I've learned and what you need to know
Fifteen years later, I found myself on the other side of the table when our law firm was audited by the IRS. This time, there were no well-dressed bankers and attorneys around. It was a much less formal atmosphere, which is, quite frankly, how most audits happen. But still, no drama, no surprises.
In fact, despite what you see on TV and in the movies, most audits are relatively short on spectacle and long on technicalities. They tend to be slow and dogged, with lots of emphasis on paperwork, documentation and time lines. There will be no knock on the door in the middle of the night. You won't get a visit at your place of business by men wearing shades who look a lot like Tommy Lee Jones. And, unless you're in really big trouble (for reasons that I can't even imagine), there will be no dramatic entry with guns drawn.
It will all start with a letter. The letter we received was very nondescript -- a plain white envelope from the IRS advising us that we were "selected for examination." Tucked behind that seemingly innocent statement was a list -- a long, long list -- of documents the IRS wanted from us and a questionnaire. At the end of the letter was a request to call for an appointment. And that was it.
So we called. And then we got cracking. There was a lot of work to do to prepare.
The document request was fairly targeted, which to be honest, we expected. In many, but not all, cases, taxpayers tend to have some idea of why they've been selected; I've found that to be true with most of my clients. In fact, the vast majority of audits are far from random and are triggered by an event or something out of the ordinary on your tax return.
And we were no exception: We knew exactly what triggered interest in our return. A couple of years before, while going through paperwork at our office, I found an error on our tax return prepared by a third-party preparer. I made the decision to correct the error (it was the right thing to do) but knew that the error -- and the correction -- would likely attract attention. I was right; I just wasn't planning on a full-blown audit.
Initially, I was out of sorts about the whole thing. I went through a whole period of "why me?" After all, I fixed the error. It didn't feel fair. But I had been at enough audits to know that it rarely feels fair. While I spent a lot of time second guessing my decision to fix the return in the first place, I ultimately resolved that I did the right thing. If I had to do it all over again, I'd do more or less the same thing. It was time to accept that it happened and move on.
We spent a lot of time in the days leading up to the audit getting the information ready. We printed out ledgers and journals and made copies of bank statements. When we realized we were missing a couple of statements, we ordered them from the bank and rescheduled the audit -- it's never a good idea to show up at audit with missing or incomplete information. When we had everything, we put it together in chronological order -- and then we waited.
It had been quite an undertaking. It wasn't fun. It was inconvenient and time-consuming. The time that I spent getting ready for the audit was time I would have spent on my business. I know from experience, though, how important it is to provide the information that the IRS requests the first time. There's no sense making a bad situation worse.
On the day of the audit, nerves were high. It is, after all, a scary process. But again, there was no drama. The agent asked to see our records, and she had a few more questions. She pored over our books. A few hours later, she was done. It was over. Of course, we still had to wait for the final audit report, but the hard part was over.
The funny thing is, as many times as I've been at audits on behalf of clients -- and even on behalf of the IRS -- you'd think it would have been easy. But it's a very different feeling when it's you (or your own business) on the line.
And, as horrible as the whole experience has been, I am oddly thankful. For one, it's given me a new perspective with respect to my clients, and that's invaluable. But more than that, it's made me think differently about how we handle our own finances and our taxes. We hired a new accountant and have, over the past few months, done a complete overhaul of our bookkeeping system. And while I've always been proud of our business, the systems part of the business has never been a top priority. I actually think that's true of a lot of small to mid-size businesses. But I've learned that can be dangerous.
So, as we head toward the end of tax season, take a deep breath. I understand the nerves. But it will all be over soon. And seriously, what's the worst that can happen? You can survive an audit, trust me.