THERE are two different approaches to prepare for an audit: organized and shoebox. Organized means systematically arranging your records. Shoebox means simply being you—naturally disorganized. Let’s discuss each method so you can determine which one is best for your next audit.
Why You Should be Organized:
1. This methodical approach of presenting data in a logical and structured fashion has worked well for me in five decades of defending taxpayers audited by the IRS. It may work for you too.
2. It calls for organizing disbursements by category (interests, taxes, donations, rental, advertising, business promotion) and by periods (January through December). It calls for preparing lead sheets with checks and receipts clipped behind Excel spreadsheets. Auditor gets impressed and may let you off the hook on gray matters.
3. This method speeds up the audit. It cuts down on your period of anxiety.
4. You send a subtle message to the agent that you want to work together. I have observed agents’ relieved (and happy) faces when they see neatly filed records. They always appreciate your assistance to decrease their inventory of open cases (including yours, especially yours) before the end of the month. This is what it’s all about—working with instead of working against the agent.
5. You may also end up finding documents that should not be there in your pile of records.
In other words, I recommend this organized approach. It has worked well for me and my clients.
Why You Should be Disorganized:
1. The shoebox approach calls for simply presenting records in a jumbled manner. It’s like being yourself. The rationale: There is less time available for the agent to dig deeper. You hope that he (includes she) spends his time sorting through your mess and not have time for examine problematic issues. You hope that the time pressure pushes the auditor to focus only on few issues rather than meticulously burrowing through more issues.
2. This paper bag approach damages your relationship with the auditor who will be less willing to compromise disputed issues.
3. While this is convenient for you (you don’t have to do a lot work), the agent will certainly not appreciate this style (he has to do much more work). You are merely transferring workload to him. Are hiding something?
4. When tax data are hard to find or not produced even after another information document request, the agent may give up and be less inclined to raise new issues (good for you). On the other hand, the auditor may threaten to issue summons for the missing records (not so good for you, malo).
5. It may be more difficult to achieve a good settlement.
6. The auditor may discover new issues amongst higgledy-piggledy records that you failed to weed out.
In other words, I do not like this approach. Stay away from this method.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].