How I survived my IRS audit
Sep 26, 2000
I was audited several years ago and survived it. I didn't have to pay any extra taxes even though the auditor said that they could have dinged me. I'm not saying that if you do what I do that you will go through your audit unscathed, but here's my story:
I got the audit letter which asked me to bring documentation for my Charitable Deductions. We normally donate about 10-20% of our income and excessive charitable deductions is one of the IRS red flags so I expected this sooner or later.
Because I was a professional tax preparer at that time, I represented myself. But the general rule is to have a tax preparer represent you at an audit since anything you say can and will be used against you.
My first task was to make sure I understood all the IRS rules about deductibility of charitable deductions and take a look at how I arrived at my numbers. The audits usually go back 2-3 years so I was glad I kept good records itemizing the various charities I gave to.
Next, I printed out a master spreadsheet that listed all the donations, subtotaled by the various organizations. They consisted of the following:
- (type 1) Church, Red Cross, etc
- (type 2) Travel Costs when volunteering (includes mileage)
- (type 3) Travel Costs attending out-of-town conference
- (type 4) Gifts in kind to Goodwill
For type 1 donations, I made sure I had all the receipts sorted by organization and date. Thankfully, I had 98% of the receipts. There were some a couple of receipts missing, and I highlighted those in my master spreadsheet.
For type 2 donations, I made sure I had a diary that showed which weeks I had to sing in the church choir and help in the nursery. I then multiplied that by the # of miles @ 12 cents per mile. Thankfully, the numbers matched my master spreadsheet. Just as a backup measure, I had the church write a letter documenting that I was in the church choir and a member of the nursery staff.
For type 3 donations, I had my plane tickets and conference fee receipts. But here, the issue was not whether I had the documentation, but whether the costs of going to the conference was deductible at all. The rules are "gray". You had to "represent" the non-profit organization at the conference and do actual work (like manning a booth) in order for the costs to be deductible. I was required to attend the conference in order to be a volunteer, but I didn't do actual work. So I was willing to concede this if it became an issue during the audit.
For type 4 donations, I had receipts from Goodwill but did not itemize what was given (my mistake!!). Since the amount was under $100, I didn't think it would be an issue, but I was also willing to concede it.
I approached the audit like I would a major sales presentation. I knew what I was strong on and what I was weak on. I knew what I wanted to fight for and what I was willing to concede. I also wanted to make sure that the audit was restricted to just the Charitable Deductions and they would not start looking at the rest of my return.
I greeted the auditor warmly and spoke only when spoken to. Auditors are people too and I wanted to create a rapport without seeming too fawning and too eager. I laid out my case with the master spreadsheet so that the auditor could see how I arrived at my numbers and that they were not created out of thin air.
Once I introduced the spreadsheet, the issue then became twofold: Do I have the receipts, and were the items on the spreadsheet deductible in the first place.
I started with the biggest and strongest item -- my donations to church. As I showed the receipts and the auditor nodded, I cross that item off my master spreadsheet. I then moved to the conference costs. As expected, the auditor stopped me to ask questions and wanted to deny it. The key here was to present it as an issue of interpretation of the regulations since I didn't want this audit to turn into a criminal case for tax fraud. At this point, I highlighted this item in the master spreadsheet to signal that this was a issue and suggested we continue the rest of the audit.
I then continued on going over each receipt one by one and crossing it off the master spreadsheet. At one point, she started looking at other parts of my tax return and asked me a couple of questions. I gave my stock answer: "I don't have a clear recollection without looking up my documentation. Since the audit was only for the charitable contributions, I left my other documentation at home. If you're interested, we can reschedule and I can return with the answers to your question." The auditor just waved me away since that would have created more work for her and she didn't smell a big payoff based on how this audit was going.
After another 10 more minutes of going through my receipts, the auditor stopped the proceedings and went back to check with her supervisor and to make copies of my master spreadsheet and some receipts. We hadn't even made it to the end of my master spreadsheet.
She then came back and told me I was free to go. I asked about the disputed conference travel expenses. She said that technically I was wrong but she would let me go this time. Apparently, she was so impressed with the volume and detail of my documentation and preparation that she will willing to give me the benefit of the doubt. Also, she didn't see any sense in completing the rest of the audit since it was pretty clear that I had the documentation to back up 98% of the expenses and I had already marked in my master spreadsheet where I was missing the documentation.
I packed up and left (saying a prayer of thanks) before she could change her mind.