Surviving an IRS Audit

I was audited back in 1997 after we returned from working in France for 7 months and getting stiffed on our last expense report the IRS decided to audit us for that $10,000+ unreimbursed business expense we claimed.  So if you want to know how well organized I am here’s a story for you.

We used Expensables back then by Quicken.  I don’t think it’s still around.  We were in France working but my husband also worked in Germany and we would travel while we were there.  Sometimes we would drive to Italy for dinner and take the consultants with us.  If you can imagine keeping track of exchange rates in order to be reimbursed.  Yeah…it was a nightmare.  But Expensables was a great product.  We entered every receipt into it on the day with the price we paid and the currency we paid and the exchange rate for that day.  It did the conversions to US dollars for us and when we submitted the expense reports it printed out it was all done.  Easy peasy.  I would take all the receipts for one expense report and put them into a manilla envelope with the little clasp you can close and a copy of the expense report.  On the outside of it I’d write the date of the report, and the amount of the report.  When we got paid for it I could notate that on the outside of the envelope.  I filed all of these in a file box. 

We also used Quicken.  If you don’t use Quicken that is one you need to do.  It is the best money management program and saves me hours of work every week reconciling things.  I’ll address that one more later.  Every transaction I do is in Quicken and categorized.  I can easily pull reports for anything. 

My husband was sweating the audit and he’s not the nervous one.  I am the basket case about anything and everything outside of the norm.  I packed up my computer with Quicken on it and took our file boxes full of expense reports and all the other receipts for that year being audited and we showed up at the IRS for our audit. 

As I suspected the auditor was challenging the large unreimbursed business expense.  So I put that box on his desk and pulled out one expense report.  I showed him how much it was for and the time period on the report.  I showed him all the receipts in foreign languages and asked him if he knew the exchange rate on X date last year for that country?  His eyes began to glaze over. 

I explained our system of Expensables to keep track and showed him all the supporting docs inside the envelope.  I then explained that the company that hired us went over budget.  In addition to that some of the consultants at the end left the hotel and didn’t pay their bills as they were supposed to so as the project manager my husband paid their bills for them.  Since the company was over budget they just didn’t ever pay us for our last expense report which he could see was in line with all the other expenses for a similar amount of time except for the additional hotel charges we got stuck with. 

He moved on from that not wanting to go through those receipts and figure the exchange rate.  He then pulled up the telephone bill.  We were deducting phone calls made to the states.  At that time we kept a personal phone line and a metro line for business.  Of course he pointed on the bill to the one number that happened to be my mother’s.  He said…who is this?  I said that’s my mom. He said that’s personal.  I said no it isn’t.  We were working in Europe but we still had a house and a business back home.  Our checks were mailed to the house and mom had to deposit checks and take care of things for us back home.  I also explained that we owned our own company.  Our company was hired by XYZ company to do a project for ABC company.  Before we could pick up the phone and call anyone we had to know why we were calling.  Was it a personal issue?  Was it an issue for our business?  Was it an issue for XYZ to resolve or was it an issue for ABC to resolve?  Because each of those companies had a calling card to use for making phone calls.  We had to know why we were calling before we could even dial the phone.  He then wanted me to prove that I wasn’t talking about personal things with mom and that it was actually a business call.  Ok.  So I pulled out our personal phone bill for that same time period.  I pointed to numerous phone calls to mom at that number.   The personal phone bill for that period was about the same as the business phone bill for the same period.  So I proved that I kept business and personal separated. 

He proceeded to ask about this or that and I did a simple search in Quicken found the transaction he questioned and showed him in Quicken where it was categorized and if necessary any explanation I had associated with it and with each transaction I could pull the apprioriate file folder from my box and show him a receipt.  We spent less than an hour in his office before he turned around typed something into his computer and printed a nice little form he gave us indicating our tax return would stand and not be challenged. 

WHEW.  Glad that was over but as an analyst who loves data and has always loved being organized (at least on paper) it was to me the crowning moment of my life.  My record keeping skills passed the IRS!

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