So, what’s an IRS audit like, you ask? Well, it’s not all fun and games and pastries and making out, no matter what Will Ferrell and Maggie Gyllenhaaaaal would have you believe. In reality, it’s a lot more like having a very polite but unwelcome guest camped out in your office for two days. Or in my case, since my business is long-gone, in my dining room.
On the first day of the audit, there were actually two agents involved. One appeared to be supervising the other, which made me a little worried about what was going to happen when the supervision was lifted. The first two hours of the process were an interview that covered the details of my business management and financial record-keeping. We went over three years of tax returns and I was asked specific questions about how and why I got to each number reported. In several instances, the number on the form didn’t match the number printed out from my own books, so I was really at a loss to explain the difference. On the plus side, the numbers were mis-reported in a way that was unfavorable to me, so at least it didn’t look like I was fudging for my own benefit. Well, except for that big missing entry for the end of 2007 inventory total that falsely inflated my losses by thousands of dollars. But that was an accident! Or software error, or something! I swear! (I'll be talking to TurboTax about that soon.)
I also tried to use the interview to mention the hardships that surrounded and infiltrated my ownership of the store. I talked about the armed robberies, the break-in, the real estate debacle, as well as my own personal tribulations over the last couple years. When I finished, one of the agents said, “And now you get audited!” I chuckled ruefully and said, “Well, it seems a fitting end.” It seemed like they were sympathetic, but I know they’re all trained to be super-nice now, so it’s hard to tell for sure.
After the interview, the agents spent the day poring over my returns and all the paperwork associated with them. In a fit of unfounded confidence, I offered to provide the year’s cash register journals, a daily record that backed up the sales numbers I’d entered in Excel. And then … I couldn’t find them. Or worse, I could only find some of them. After May 2007, they were just … gone. Could I perhaps interest you in May 2006? No? Okay, I’ll … keep looking.
I tried to distract myself with other things, but I couldn’t help listening to the agents discuss every single little element. I heard them in a long discussion about my initial contribution to the partnership, which basically went like a point/counterpoint about whether or not the very foundation of the business and my stake in it was legally sound. So that was relaxing. I tried not to seem eavesdroppy, but if things seemed questionable and I had additional information to offer, I would bust in and offer it. But they were also unshy about bringing random pieces of paper to me and asking me to explain what was on them. Often repeatedly.
After eight hours, they went on their way. I spent the evening trying to figure out where I could have possibly put all those cash register journals and stressing about all the incongruous and missing information that had come to light during the day. And also, repeating one of their interview questions over and over in my head: why had I decided to file my business taxes myself?
The next morning, only one agent returned. This made the process a lot quieter, what with the lack of chit-chat and consultation, but it also seemed more stressful and official. There were a lot more questions, too, but unfortunately, not many answers. No, I could not explain why there was a difference in the inventory expenses I had on record and the amount on the return. No, I didn’t know why the same $203 in supplies appeared twice on my return. And no, I really and truly didn’t have a double-entry accounting system. My triumphant discovery of the missing cash register journals (14 months’ worth jammed into the “Current Month” folder in my file cabinet, of course) didn’t seem to impress her the way I’d hoped, either.
I didn’t imagine how my tiny little business could take as long to review as a larger corporation, but the second day dragged on well into the afternoon. It was 2:00 before she packed up all her files and peripherals and told me she would send me her report … by the end of July. What I may end up owing, or being owed (that’s the spirit!), will remain a mystery until then. The only thing she could tell me with some level of confidence was that I’d have to re-file an amended version of my 2008 return, to avoid another audit.
It’s always nice to have something to look forward to.