Earlier this month, I posted on WalletPop that tax audits were on the rise. I know – not just because the IRS has admitted as much (they have) or because I’m seeing an increase in audits at my practice and with my colleagues (I am) – but because I’m finding myself on the other side of the table this week. Yep, I’m facing an audit.
I actually thought long and hard about whether to post about my audit. Many of my colleagues warned against it, citing all kinds of good advice from “you don’t want to tick off the Service” to “it might be too much information for your readers.” While I appreciate the kind thoughts and consideration, one of the things that I love about my blog is that it gives me the opportunity to share what I’ve learned about taxes – and maybe that means from law school or a CLE or from my vociferous reading of tax news. And maybe it means my own experiences.
When it comes to audits, while the odds of being audited are on the rise, there is a method to the IRS’ apparent madness. I’ve stated before that the chances of a random audit are slight – about 2%. Most audits are targeted either because you meet a set of criteria that the IRS has put a bull’s eye on – or because of a flag. In my case, it’s “all of the above.”
Our law firm is a small business. It’s also an s corporation (you can be a party to my “reasons I hate s corporations” rant later if you want). In terms of increased audits, check and check. So we were probably already on the radar simply because we exist.
But then *the mistake* happened. Our tax preparer erred on our tax return. When I returned from maternity leave, I insisted on correcting it – a feat that was actually harder than it sounds and involved lots of paper. In our letter to the tax preparer advising of the amendment, I wrote that I was correcting the mistake because I did not want to be an audit target. Oh, the irony.
After the dust settled, I knew, of course, that the damage had been done.
It was no surprise then to get a letter from the Service advising that we were “selected for examination.” I’ve seen a ton of those letters before. I’ve responded to many of them on behalf of clients, I’ve just never had to do it myself. It is, I must say, a completely different feeling.
For those of you who have never been audited, let me advise that the experience isn’t fun. The requests for information can be somewhat overwhelming – especially for a small business. Our bookkeeper has spent days and days putting together charts and reports. We’ve been printing out ledgers and bank account statements and desperately looking for supporting documentation. It’s all part of the examination process.
All of that said, it is what it is. There’s no use being freaked out about it – advice that I give my clients (and my readers) and advice that I’ll stand by.
It’s inconvenient. It’s a burden. And there could be irritating side effects (like being targeted for audit again, I know how this works). But there’s nothing that can be done at this point and worrying about it won’t change anything.
We’ve got nothing to hide. There’s no second set of books (yes, people really do that) or undisclosed income (we should be so lucky). We haven’t been underreporting or over-deducting.
So, I’m trying to take something positive from the whole mess. Besides blog fodder (how convenient is that?), it is giving me some additional perspective from the client side – and that can only be good, right?
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