HOW TO SURVIVE A TAX AUDIT

By Frances McGuckin

After recently writing about the tenacity of income tax small business auditors, the phone rang and a worried client informed me that "They are coming to audit our business in a few days." This was a surprise to both of us, but my immediate reaction to Jennifer (name disguised to protect the innocent) was: "Well, if there's one client I am not worried about, it's you."

A tax audit audit not only reflects on the client's ability to keep good records, but also on their business and accounting advisor. Over the years, we had worked together to ensure accurate reporting. Jennifer also has an excellent bookkeeping background and keeps meticulous records for her and her husband's partnership business. However, that doesn't stop one from sweating a little.

The result of the audit was that the tax department thanked Jennifer for maintaining such good records. Her taxes were filed correctly and all her books and records were in order. When I questioned Jennifer as to the areas that the tax department focused on, they were vehicle usage and promotional meals.

"They didn't query the vehicle that is used 100 percent for the business," says Jennifer, "but they carefully scrutinized the records of the other vehicle which I claim an 80 percent business usage for. As nice as the auditor was, he asked some pretty sneaky questions, such as how far it is between trips and why I used the vehicle. I hadn't kept a mileage log, but because the records were in such good shape, he allowed the full deduction, advising me to keep one in future."

Jennifer explained how thoroughly her vehicle records were analyzed, particularly the personal usage part. The auditor even picked up a small accounting error, although it did not affect the tax returns. He focused on the meal claim, which was relatively small. "What type of meals are in this claim?" he asked.

"Some client meals, and some staff meals when we were working late," Jennifer replied.

"You know that staff meals aren't a tax deduction," informed the auditor. "They are a taxable benefit to the employee. But since you have claimed so few, we will let it stand." He explained to Jennifer about putting a client's name on the meal receipt. I don't think he looked in her appointment book to match up the receipts, but this is common audit practice.

This delightful experience could happen to you-are you ready for it?

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