Printer Friendly
View as PDF

It was one of those nice spring days when walking to the mailbox provides an opportunity to breathe the fresh air, relax, and get out in the sun.  What started out as a nice leisurely way to end a day turned into three weeks of hell.  You might be thinking, “How can a leisurely stroll to the mailbox end in such misery?”  A thick envelope from the Internal Revenue Service produced my angst.  The cover letter inside started out pleasantly enough, “Dear David... We have selected your federal tax return for the year shown above for examination.”  It reminded me of the letter you would receive from the draft board, “Dear Sir.... Your friends and neighbors have selected you.”

Both of these letters with similar extremely gentle opening lines still end by putting a knot in your stomach.  Maybe the draft was a little scarier, but the knot was the same.  My strong accounting background told me that this was not a good thing and was going to take a lot of work.  And the year they selected- Wow!  It was my first fulltime year as a business consultant, and my records were an absolute mess.  While I have a great accounting system, with a perfect chart of accounts coded to my Schedule C,  my receipts were randomly stuffed in a manila envelope. The great accounting system notwithstanding, getting information into the system was still in a state of flux.

The letter went on to say, “Your examination will primarily be focused on the following issues:” (It seems to me that the visit to my proctologist was also called an “examination”), and listed three areas on my Schedule C- Other Expenses, Office Expenses, and Legal and Professional Services. These three areas covered over 300 transactions.  Included with the two-page cover letter was an “Information Document Request,” IRS form number 4564. There was one two-page form for each separate issue. 

Form 4564 is the heart of the “examination” asking you to provide the following list of items that include:

1. Accounting records detailing the expense deducted
2. Cancelled checks, invoices and/or receipts to verify the expense claimed
3. Brief description of the expense incurred and the business purpose

There were a number of questions racing thought my mind.  Do I have all of the receipts?  Do they want to look at more years?  How much will this cost?  Why me?  Where are my returns and that manila envelope stuffed with my receipts?  Can I retrieve online purchase receipts?  How can I get lost receipts?  How much will this cost?  I actually did start repeating myself. 

The best advice stay is to cool but develop a solid plan. Remember you are dealing with IRS Auditors who will bring their “A” game.  Don’t think you can go up against them without a solid plan.  While it will take time to prepare for your face-to-face meeting, this is time well spent, ultimately giving you the confidence needed to defend yourself.  A Schedule C is a red flag to the IRS-- who is betting that your records aren’t that good, leading to new tax dollars for the government.  However, with a good plan, you can defend your return, and minimize the amount of additional taxes owed.  Next month, we’ll look closely at the plan you will need if “You have been selected.”

Let me know if you have any comments, questions, or suggestions.
Write David W. Weatherholt at david@bnewsviews.com

Copyright © 2011 Weatherholt & Associates, LLC all rights reserved worldwide.
Business/News & Views® is a registered trademark of Weatherholt & Associates, LLC