THERE are two approaches to prepare for an audit: organized and shoebox. Organized means arranging your records. Shoebox means simply being you—your naturally disorganized you. Let’s discuss each method so you can determine which one is best for your next audit.
Why You Should be Organized:
1. This approach of presenting data in a structured fashion has worked well for me in five decades of defending taxpayers audited by the IRS. It may work well for you too.
2. Organize 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.
5. You may also end up finding documents that should not be submitted to auditor.
TIP: 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.
2. This paper bag approach damages your relationship with the auditor who will be less willing to compromise disputed issues. It may be more difficult to achieve a good settlement.
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.
4. When tax data are hard to find or not produced even after several information document requests, 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 missing records (not good for you).
5. The auditor may discover new issues amongst messy records that you failed to remove.
TIP: 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].