The Tax Man
So, you find out that you're being audited and, of course, you immediately begin to sweat. Panic sets in. The first thought that crosses your mind is "why me?" Immediately after that, your mind starts to tick off all you've ever heard about taxes and audits. Look at all those billion dollar corporations out there that you know, from watching "60 Minutes", don't pay any taxes. And how about the friends who've told you all the sneaky little tricks they've pulled and gotten away with. And the creeps you know who don't deserve the piles of money they have (not relevant, but it still crosses your mind.) And then, there are your friends and relatives who have been audited in the past, and gotten slammed, even though they were sure that they, or their tax accountant, had done everything right.
Once you've accepted the inevitable, you are being audited, you begin to emerge from your panic and ask around for advice. The one thing everybody tells you, in one form or another, is "Don't go yourself!" "Let your accountant do it." Now, if the accountant who actually prepared your 1999 taxes happens to be alive, you'll probably call him or her. If, however, your particular bizarre situation includes having had a tax accountant who has since crashed and died on his Harley, you're out of luck on that one.
Let's say, for the sake of argument, that at about the same time this notice of an audit reaches you, you just happen to be consulting with an attorney on a completely unrelated matter. And when you mention the impending audit, she informs you that: a.) she's really a tax attorney; b.) she knows everyone in the IRS audit office; c.) she'll handle it for you, because you CANNOT, under any circumstances, go by yourself. In fact, YOU can't go at all, because you'll be too honest, get yourself in trouble, and wind up owing more than they say you owe. So she tells you to relax, let her handle it, and the whole thing will go away. Since these were the exact words you so desperately wanted to hear, you begin to calm down. And right about then, she tells you about your homework.
Because there will be a whole heap of homework. Especially if the audit is for 1999 and it is now 2002. Especially if you happened to have an unruly five bank accounts back then. Especially if you had not one, but two, sole proprietorships running out of your house, and have since moved. And, most especially if you were somewhat casual about holding onto old bank statements, deposit slips and credit card bills. Obviously, the first thing you do is rummage, forage, scour the place for everything you do have. Then, you call the bank and order every missing statement for each and every one of those five accounts. That in itself is a costly and time-consuming process. But it's only the beginning.
The hard part is tracing the money. Because this is what the audit is all about. In fact, this is extremely valuable information for anyone who is ever facing an audit. They add up all the deposits made into each of your accounts. And they come up with a number that's significantly higher than the amount of money you have declared as income. They proceed to ask you how this could possibly have happened. What they are really asking is, where did you hide the rest of the money? Your job, then, is to prove to them that there was no other money, and that, in fact, it's ALL THE SAME MONEY!
You accomplish that by ruining two perfectly good weekends (approximately 32 hours) attempting to trace and then document each time you transferred money from one account to another. Like, you got paid $2500 for a job you performed. And you deposited that check into your business account. And then, you transferred that $2500 into your checking account in order to pay your mortgage. Another $2500 deposit. The IRS counts that as $5000, unless you can show them that it's the same money! Or, you take a $2000 cash advance on your Visa card. Then, you deposit that into your account to pay the mortgage. The IRS counts that as $2000 in income, unless you can show them that it was a "loan" from an interest guzzling credit card company. Or, let's say that you owe a particular vendor $3000, and your client hasn't paid you yet, but you need to pay the vendor. So, you borrow $3000 from your husband's company, deposit it in your account, and write a check to pay the vendor. Then, the client finally pays you, so you deposit their $3000 into your business account. And, of course, you repay your husband's business with a check for $3000. Guess what? According to the "adding all the deposits" method, that's $9000 in income! You know it's all the same money, in fact, it's income offset by expense, but your job is to prove that.
Then you return to your tax attorney, and try explaining all of that to her, along with your stacks of statements, your carefully paper-clipped bills and receipts, and your impeccably composed summary spreadsheets that explain everything. This takes about an hour. It should take several hours, but she isn't really paying attention, because she knows all about auditors and she knows how to handle them. All your work may not even have been necessary. But it's good back-up material, and she's glad you did such a thorough job. Relieved, you hand everything over to her and sit back until she makes it all go away.
Except it doesn't. The next time you hear from her, she has returned from her meeting with the auditor. She tells you he was a jackass. This does not sound promising. When you ask her what she accomplished, she tells you about the second audit appointment. When you say that perhaps you should go instead, she says he'll (the jackass) destroy you and that she should definitely go. All of that is very very bad news. But not nearly so bad as the $2250 invoice she presents you with for time already spent on your behalf with the Internal Revenue Service.
After firing your attorney, you are back at square one. Everyone continues to advise you to send someone else... your new accountant, an audit specialist, anyone but yourself. And then, finally, you start to think clearly. You cannot bear the thought of explaining everything to yet another person. You can't afford to hire anyone else. You understand your own case better then anyone else ever could. And, you have absolutely nothing to hide, especially money!
So you go to your own audit. And the auditor is delighted that you, the actual taxpayer, has shown up. He tells you that tax attorneys make him real suspicious. He tells you that your attorney came in with lots of "attitude." He hates attitude. You and your auditor have now bonded. You both dislike your former attorney.
Then slowly, patiently (because he has all the time in the world and is actually paying attention) you show him how you transferred the money. How you borrowed the money. How you stretched the money, just like he probably has to do, in order to survive. He is NOT a jackass; in fact, he's a really nice guy. And every single bit of your hard work over those two weekends is appreciated; he loves the way you traced the money. Turns out, all you had to do is be honest and prove your case. Before you leave, you share a Diet Dr. Pepper and warmly shake hands. After all, he was only doing his job. And in this case, he did his job well..... but so did you.
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