Okay, maybe love is a bit much said.
But the whole audit/examination process is over (at least for now, yes, yes, we know that 2008 is coming). It was oddly informative. While I’ve dealt with the IRS tons of times before, including related to audits, there’s still a different feeling on the other side of the table. Here’s what I learned:
1, Be nice. I know, I know. But hear me out: your mother was right about this. A little bit of kindness can go a long way.
Yes, the system is adversarial. Nobody is excited about paying taxes. And the mission of the IRS is to collect taxes. So, there you go: problem from the start.
But taking the position that you won’t cooperate isn’t helpful. In fact, it’s just the opposite. Think about it… what kind of frame of mind are you in when someone is rude to you? Do you think, “how can I help this person?” or do you think, “how can I teach this person a lesson?” Right.
The agents have a job to do, whether you agree with their position on the issue or not. And in my line of work, it’s all too often that I don’t agree with their position. But it doesn’t help to be a drama queen – or worse, a martyr. It simply complicates an already unpleasant and awkward situation. Remember, neither one of you wants to be at that table. So be nice. The time will go much faster. And your mother will be proud of you.
2, Don’t hide your head in the sand. This is probably the biggest challenge that I see in my practice: people are scared of the IRS. So they hide. They don’t open mail. They don’t answer phone calls. They don’t respond to audit requests. Big, big mistake.
During our audit, the agent noted that we were very responsive to the IRS with respect to inquiries. When we did not understand something, we questioned it – either with our tax preparer or with the IRS. This is so key.
Don’t ignore the IRS. It ticks them off. And it makes you look uncooperative (see #1). And it doesn’t make anything go away.
When you get a notice from the IRS, don’t be scared. Open it. Read it. If you don’t understand it, call the IRS. Or call your tax professional or attorney. And if you can’t afford those options, call Legal Aid.
Next, acknowledge the notice. The notice is asking you for some kind of action (a call, a payment, a tax return). Take some action – even if it’s a phone call to say that you got it but that you need to check with your tax professional.
I’ve literally had clients walk into my office with suitcases (yes, suitcases) full of unopened notices from the IRS. This is just the worst thing you can do. Take a deep breath. Open the notice. It will be okay.
3, Be organized. I’ll openly admit that I’m not the best organizer on the planet. I have a busy practice, I blog, I write for a newspaper and have three small children and a husband – you can surmise on your own which of those takes the most time (hint: there are cupcakes involved).
But I save almost everything. That’s a good first step.
For our audit, we received a check list of what the IRS hoped to see. It was a loooong list. Cancelled checks, bank statements, minute books, the whole bit.
So, we went through the list, one item at a time for both years in question. We had a Year 1 pile and a Year 2 pile. And we put each item in a folder or a binder for the corresponding year.
On our accountant’s advice, we also put together tables showing total deposits, total distributions, etc., which were compiled directly from our banking and other statements.
When my husband was wrapping up the final audit package, it got even more organized. He added tabs and dividers. And while I made fun of him at the time for his excruciatingly detailed annotated cover page, the agent was glad to see it. And again, it made the time go much faster. That’s a good thing. We didn’t want to spend any more time with the agent than we had to… Being organized ahead of time made responding to questions much easier.
4, Fill in the holes. When we were putting our records together, we noticed a few holes: a missing bank statement or two here, an incomplete ledger report there. We called our bank to get those records and the bank said it would take awhile. So, we picked up the phone and asked the agent for another week. We got it.
In that extra week, we went down to the bank and waited in person to get those statements. We dug through our computer records and printed out ledgers and trial balances (no, I didn’t even know what a trial balance was).
If was on our list, we produced it. If we couldn’t produce it for any reason, such as it didn’t exist (as with credit card statements since we don’t use a credit card at the firm), we clearly noted that on our cover page (see #3 above).
There’s no reason to show up at an audit with half of your documentation. All it does is raise new questions. So, take the time to gather information. If you need more time, ask. But don’t show up empty-handed.
5, Be willing to admit a mistake. It’s always hard to admit a mistake. It’s particularly hard when you do this for a living. After all, I’m supposed to be perfect, no? (And yes, that was rhetorical and not an opening for my family to opine)
But the reality is that while I didn’t make the mistake, I still knew about it. And it was for my business – with my name on it. And they were tax returns that we signed. The right thing was to say that we had made a mistake and try to fix it.
Again, the agent appreciated that.
It’s okay to make a mistake. We all do – nobody’s perfect. The key is to fix it. Call up your tax pro and ask, “what’s the best way to fix this?” And then do it.
6, Don’t discount your own judgment. As a tax professional, I like to think that I give good advice. And I’d like to think that many of my colleagues do, as well.
But here’s the thing: we generally have a limited snapshot into your life. A notice from the IRS. A bank statement. Your version of what happened.
You’re the best judge of what really happened. Even if you don’t know the law, you were witness to how you got to the point you’re at. That’s a valuable commodity. Don’t be stingy with it.
Ask questions. It’s your name on that return. And that’s what the agent is going to remind you at audit. So make sure that you feel comfortable with what you’re submitting. And, if you’ve done your best to explain your situation and you don’t feel comfortable with the answer from your tax professional, then maybe you need a second opinion.
7, Learn a lesson. When I first posted on twitter that I was going to blog my audit, another attorney (@GourmetLawyer) asked: What’s your plan to prevent it in the future? It is a great question.
I’ve learned so much from this process… Since the mistake, we’ve totally revamped our accounting system. We’ve hired a new accountant. We have a new filing system. It’s all the same information as before – just better organized.
Oddly, I also have a lot more confidence in my business now. Audits can be scary. That can make you question the way that you do everything – and sometimes, that can be a good thing. But it also reinforced to me that we were doing lots of things the right way. That’s a terrific feeling.
So now, we’re waiting for our closing report and hoping for the best. And going into the holidays, I have to say that is something to give thanks for.
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