Today my business was audited by the IRS.

Of course it was absolutely absurd for the IRS to spend money on auditing tiny little excruciatingly honest me.  

And it was fascinating. 

To start with, the IRS man, who, since I didn’t ask permission, I’ll just call by his first initial – “M” – was very nice.  Not that I expected otherwise,  but it was delightful to go through the process with someone who was just genuinely nice and whom I could enjoy talking and even laughing with.

And the whole thing took about 1/3 the time he’d told me to expect.

Why?  Very simple:  I have very complete, very organized records.

My being organized is slightly legendary among friends and acquaintances.  I’ve been called everything from anal to self-disciplined.  I don’t think the former is true, and the latter is definitely not.

You see, I have an absolute hatred for not being able to find things.  Therefore, it’s pretty much impossible for me to create piles of stuff, or to not file things, or even to not balance my checking accounts.   It would, weirdly enough, be far more of an effort of self-discipline for me to not be organized. 

This meant that, following the instructions in the letter I received from M, I spent about two hours over the weekend collecting file folders and printing out the electronic receipts for Internet purchases I’d made that year.

When he arrived, it was all laid out on my dining room table.  He spent about 45 minutes interviewing me about my business and my records, and then I turned him loose on the folders and went back to work.

And because it was all so organized, and because everything on one side of the picture (deposits to my business and personal accounts) had an origin on the other side of the picture (business income, for instance), he was done by noon. 

Initially, it seemed that my tax software had barfed and created an error in the IRS’s favour. 

But then we spent an additional half hour tracking down an apparent discrepancy, and discovered that the barfing was actually in my favor. 

To cut a rapidly-growing-too-long story short, here’s what I learned that might help you in your IRS travels, whether you have a business of your own or not.

1. Keep those records.  Even if for you it is a matter of self-discipline, it’s so worth it.  M told me that most audits take at least a day, usually a day and a half or more.   And if your records are wonky, not only will it be a more-painful audit process, but you’ll just generally have a greater chance of missed deductions and other errors.  All of which will have to be sorted out in an audit, and which may be costing you real money every year.
2. Don’t panic.  These guys aren’t here to catch you doing something wrong.  They really are – or at least, M certainly was – just interested in ensuring accuracy.
3. Be aware of what might flag an audit.  In my case, it was three things – and I’d do them all exactly the same again, with the possible exception of the error made by my tax software!
   1. This was an audit of an early year in my business, and one of their questions was, quite reasonably, “How is she paying her bills?”  (A question I wondered about myself that year…)
   2. The deduction for utilities was disproportionately high versus known utility rates, what would be expected for a utility bill for a home office, and what I’d reported the previous year.  (This is where my tax software goofed.)
   3. Similarly, my health insurance premiums were disproportionate to what I’d reported the previous year.  (That was easy; I’d for some reason not reported any the previous year, even though I’d had insurance.)
4. Be aware that your tax software (if you use software) or even your paid tax preparer person (if that’s how you get your taxes done) can goof.  That’s what happened to what was reported for my utility bills.  I’m not at all sure what I’d do differently, because I rather doubt I’d have caught the errors that were made… but I do plan to review the final filing a little more carefully now I know what can happen.

Even though you may be running a very small, not to say itty-bitty, business, the tax man is watching.  So if you don’t know how to keep accurate records, get help.  (I owe my friend Sherry a HUGE vote of thanks for her help getting my bookkeeping process established early on in my business!)

And if you do get picked for an audit, don’t panic.  Making it easy for them will help them make it easy for you. 

Me?  I not only have a whole unexpected half day today to catch up on work I’d expected to be doing tomorrow, but it also looks like I’ll probably be getting a very small check from the IRS.  (Very small.  But better that, than t’other way around!)