True Story: I Got Audited

What if you got audited? How long do you have to turn in your paperwork? Does an audit affect your credit score? Click through for one woman's story and tips on how to deal if you get audited.

How would you deal if you got audited? EXACTLY how terrifying would it be? Do IRS agents show up at your door? Becca got audited and shares her story.Tell us a bit about yourself!

I’m Becca, I’m 33 years old, I live in Mill Valley, CA (just north of San Francisco and under the redwood trees). I’m a writer, women’s coach, and big believer in working with your hands.

Prior to this, how did you feel about your bookkeeping and tax-paying? 

I’ve been in business for 4 years now and it’s been a slow evolution into being what I’d consider “on top of it”. My first year I barely looked at my numbers and hired a bookkeeper halfway through because that’s what everyone else was doing and I was basically just mimicking what other “successful” people did.

I paid her 4x what I pay my bookkeeper now and I never once looked at the reports she sent me monthly. It was too painful to take myself seriously. I knew the numbers weren’t good and I was too scared to face the reality of it.

Since then I’ve hired a bookkeeper I work with regularly and I log into my books 2-3 times a week to look at and track my money. And I have an accountant and I had a financial advisor. Oh, how the tides have turned.

How did you feel when you got the notice? What ‘triggered’ the audit?

I felt paralyzed. It was something I had characterized as my ‘worst nightmare’ on more than one occasion. It felt like I was caught (kind of like how I feel every time I drive and I see a police officer on the road – I’ve clearly done something wrong!) and I had so much shame come up for me.

The first question I get asked when I share my audit story is, “do you know why you were audited?” and the short answer is no, I don’t. They didn’t share that information with me when they sent me the letter. I have some theories based on conversations with my bookkeeper and CPA about it (I reported a loss, my expenses were higher than the year before, I got a pretty large refund) but I’ll never know for sure.

How much time elapsed between when you got the notice to when you sat down with IRS agents? And what steps did you take between those two events?

I never actually met with any IRS agents. They gave me a 30-day window to get everything together (record of every expense for the entire year of 2015) but I kind of freaked out and needed more time, so we sent a petition asking for more time, which they granted. I ended up submitting everything within a couple of months.

What did the actual audit looks like? 

The audit simply requested that I provide evidence for every single expense for that entire tax year and mail it to them. Every audit is different, so this may not be the case for you (knock on wood). 

Because I knew I didn’t have most receipts and invoices for that year and was feeling super scared, I called my bookkeeper and we sat down at my dining room table for several days and went through every single expense, line by line, finding and printing proof it was a business expense.

It took a long time (and I spent about $1,000 in bookkeeping fees) but it felt so good to submit a thick, gorgeously color labeled binder to the IRS. I felt organized and ready for however they wanted to respond. 

Have you reached an outcome yet? 

Yes! When I was on holiday in Italy this May, I got the text from my bookkeeper that a letter arrived from the IRS stating “no change” to my 2015 taxes, which means I didn’t owe anything additional. Nothing happens next, I’m free! Except that I’m WAY more on top of tracking my expenses than I ever was before. 

Does this affect your credit score, ability to get a loan, anything like that?

Nope 🙂

I’m sure this was super stressful! How did you take care of yourself while all of this was going on?

I told my friends – my close business buds who wouldn’t judge me. They were so understanding and cheered me the whole way. So then I started sharing on Instagram and got so much love that way. It was like I had my own cheering section, and it felt good on those days I was buried in paper. 

Based on your experience, what will you do differently from here on out? 

Thinking back to the person I was back then, I can see all the ways I wasn’t fully empowered in my business. I had a bookkeeper but I avoided her emails and never took a look at the Profit & Loss reports she sent me.

I wasn’t paying close enough attention to my bottom line and had a rather expense-heavy business that ultimately reported a loss, which I was OK with since I kept hearing in business school that businesses typically take a loss the first 2-3 years in business as they are building up. 

But, by far, the source of the majority of my audit shame was the fact that I didn’t keep any receipts. Like not a single one.

My reasoning for this was the fact that we lived in the digital age and most of my receipts could be found over email and was told on multiple occasions that a credit or checking account statement was enough to provide proof of expenses. And, besides, I was a super small business. Clearly I wasn’t on the radar of the IRS while there was all this mischief going on on Wall Street.

I want to be super clear about something: CREDIT CARD STATEMENTS DO NOT COUNT AS PROOF TO THE IRS!

If you’ve been relying on that as a form of receipt, end that practice now and start your receipt saving practice immediately (more on that below) because it ain’t gonna cut it. 

How I track my receipts now is I apply a label to every automated invoice and payment receipt that hits my inbox called “business receipts” and the year. As soon as I receive a paper receipt, I take a picture of it with my phone and upload it to my bookkeeper software (I used Quickbooks Online).

What surprised you most about this?

The VERY fast turnaround they request of you. When you get the letter, you gotta clear your schedule and get moving. Also, I surprised my self in my own ability to make this happen and get it done. When I received the notice, I truly thought I was doomed.

Which books/websites/tools helped you navigate this?

I really leaned on my bookkeeper for this. But the best tools for me was Quickbooks Online and the receipt image function.

What advice would you give to anybody going through something similar?

Breathe. Reach out for support. You totally got this.

Thank you so much for sharing your story, Becca! Have any of you been through something similar? Do you have any questions for Becca? 

P.S. If you want support + pep talks about money, join our free More Money, More Happy Facebook group of 3,600+ awesome humans!

Photo by rawpixel on Unsplash

5 Comments

K

It is SO NICE to hear that I’m not alone! I got audited this year for my state taxes. After doing a little research, I learned this is a pretty standard “desk audit” for self-employed people who submit a Schedule C and request the EITC (earned income tax credit). My income was quite low last year (my second year in business) with about 20% going towards expenses. I’m still waiting to hear back. The stress of figuring out the audit and GDPR compliance at the same time definitely impacted my Q2 earnings. Truthfully, this shook my confidence and optimism about getting my business off the ground. It’s actually kind of funny – not only did I earn half of what I’d expected last year, but I also got audited because of the low income. 🙂 I did my taxes with a tax preparation software and after this experience would definitely suggest self-employed people think twice about claiming the EITC even if the program says you qualify.

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Becca Piastrelli

Oh K, I feel you on the stressful Q2 with the audit and GDPR. Sounds like we have a similar story, and I know that, whatever the outcome, this will make you a wiser, stronger business owner!

Reply
Sophia

Whew. I am so glad this turned out well for you. It also sheds some light on what the whole mysterious “audit” experience could look like. I am going to take this as an opportunity to see where I can clean up some of my own expense tracking and business financials. Thank you for sharing so honestly so we can all learn. I appreciate you!

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