On being ... a rite of passage

By Ingrid Sapona

A few columns back I mentioned I was notified about being audited by the IRS. Well, I’m happy to report that it’s over. In terms of tax, it was pretty much a non-event (though I owe about $25 plus interest). In other respects, it was quite an ordeal.

It started with a letter notifying me that my 2007 return was selected for a “compliance research examination”. The letter explained that the IRS “must examine randomly selected tax returns to better understand tax compliance and improve the fairness of the tax system.”

The letter went on: “If we find any errors during the examination, we will give you the opportunity to explain them. The results of this and other compliance research examinations will improve our effort to help taxpayers understand and follow the tax law, reduce unnecessary and costly examinations, and reduce burden on taxpayers.” Well that sounds reasonable, I said to myself. The letter instructed me to call Agent John Doe (not his real name) by a certain date.

I immediately phoned my accountant Ted (not his real name). Ted was aware the IRS was conducting a “research project” related to Americans living abroad -- other clients of his firm have been contacted. Lucky me -- I was the first person in Toronto that he’d heard about.

Ted reassured me that I have a straightforward return and he thought it would probably be handled as a “desk audit”, which meant that I’d have to provide specific backup documents related to various items on the return and that would be it. He also offered to be on the line when I phoned Agent Doe. I took him up on the offer and we placed the call.

A gruff-sounding voice answered: “Agent 1234567, John Doe here”. I kid you not – he gave his IRS agent number before his name. I suddenly felt like I was in a Monty Python skit about an officious tax auditor. I took a deep breath and introduced myself.

Agent Doe immediately explained that the examination is related to a research project and that I’m not being audited. Whew -- that’s a relief, I thought. He then added, however, “Of course, if there’s any discrepancy I’ll have to make an adjustment and if you owe anything you’ll have to pay it, along with interest and penalties, if applicable.”

Then, to make me feel better (I assumed), Agent Doe commented that my return is fairly straightforward. Ted and I both voiced our agreement to that. Then I asked about the procedure for this “examination”. I was quite floored when Agent Doe explained he’d be coming to Toronto for the “interview” portion but that in terms of reviewing my records it was my choice: he could either review them “on-site” or he could take them with him.

Ted asked what “on site” meant, given that I work from home. You guessed it – it meant at my home. Then I asked how long it would all take and I was stunned when Agent Doe said probably about five days. “Five days? But you just said my return is straightforward,” I protested. That’s when Agent Doe explained the real difference between this and an audit: “On an audit I would pick a few items and verify your backup documents related to those items to make sure things look right. If things are off by a few bucks, that’s ok. With this research project, however, I have to look at everything and account for things to the penny,” he said. My earlier relief suddenly evaporated as I realized this would be more like a “super audit”.

We settled on a date for the “interview”, leaving for later the decision of whether Agent Doe would be examining my records on my dining room table. Before ending the conversation Agent Doe said he’d courier me information about what he wanted to see. Two days later I received a three-page list of questions.

I immediately began compiling the requested information. I found it all, but I got nervous when I couldn’t come up with the exact figures Ted used on the return. Fortunately, a few days before the audit, Ted walked me through it all. Though I was disappointed to find a few minor errors (basically figures that were transposed), I consoled myself with the idea that Agent Doe was bound to find something. (I hate to sound cynical, but I figure he has to justify the cost of his trip.)

So, at 8:45 a.m. (sharp) on Monday the 19th, I met Agent Doe at the security desk of my building. Taking my cue from our initial conversation, I decided the best approach was formal and all business. So, after asking to see two forms of ID (can you say officious?), I escorted him in. After interviewing me for 90 minutes we started on the specific questions about the return. By lunch time I think it was clear to him that: 1) my operation truly is small and straightforward -- a year’s worth of business receipts fit into one (thin) file folder, and 2) he wasn’t going to need the three days(!) he had scheduled to go through my stuff.

I think he could have plowed through all my information that day, but since he didn’t have another appointment in Toronto until Thursday, he called it quits around 3:45 p.m. Because I was unavailable on Tuesday, he took some of my documents with him and we agreed to meet here on Wednesday. Before leaving, he commented on how organized and thorough my information is. (Damned right, I thought!) Oh, and he mentioned that no one’s ever asked him for two forms of ID. (Damned right, I thought!)

I didn’t know how long it might take on Wednesday, or whether he’d ask for additional information. Turns out, it took less than a half hour. He told me the adjustments he proposed (they were the mistakes Ted and I had caught) and approximately what I would end up owing as a result. I agreed, and that was it. He thanked me for my cooperation and again commended me on my organized and thorough record-keeping.

When all was said and done, though the amount I’m out of pocket is negligible, the whole thing cost me more than 25 man-hours. (Kind of ironic that the alleged reason for this research project is to “reduce unnecessary and costly examinations” – but never mind.) And it was quite stressful. As I was preparing for the audit, I couldn’t help think that I must have been singled out because I did something wrong. Though I take my business seriously and I consider myself a professional, I don’t use any sophisticated software or complicated filing systems. I kept wondering if I should be doing things differently.

Mind you, some good did come of the experience. For one thing, as I was responding to Agent Doe’s questions, I began to feel more confident in my business practices. Indeed, the fact that he complimented me on my records was gratifying. But perhaps the most unexpected positive to come out of the whole thing was my new-found appreciation for what a great role model my father was and how much he taught me about owning a business.

You see, Dad had a small restaurant and starting in junior high he let me earn my allowance by doing his books. I did his weekly payroll (complete with payroll deductions), his weekly income and expenses ledgers, and the monthly, quarterly, and year-end totals. This was long before we had PCs and computer programs. Of course, now we do -- but I never really thought of doing it any way other than the way my father did it.

So there you have the story of my non-audit audit. Or, as I prefer to think of it: the story of my rite of passage as a business person.

© 2009 Ingrid Sapona


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