Author, Diane Kelly and I have packaged tax filing and audit information into a workshop, available for chapter presentation.
For professional tax preparation information and a list of available stories featuring IRS Special Agent Tara Holloway, visit my co-workshop presenter, author and tax attorney, Diane Kelly @ www.dianekelly.com
Note of Interest: Although Diane now has a series of funny capers with Tara, the series debut novel was a Golden Heart winner.
My Tax Audit Story
In 1996, I joined Romance Writers of America (RWA) and the local chapter, Carolina Romance Writers (CRW). During a chapter meeting, our president and a working CPA gave instructions on writer deductions. Not one to pass an opportunity to save money, I took notes and developed a process to deduct my writing expenses. Since that time, I have followed that process and continued to focus on my craft.
The IRS popped my happy bubble on a cold day in February of 2007. The ordinary envelope looked benign until I noted the IRS return address in Utah and the audit notification letter of my 2004 writing deductions tucked inside the crisp brown paper. As I read the letter, my heart rate increased. Since I have difficulty separating fear from anger, I got mad. After that, I started working.
To me, the notification letter passed the typical government BS test: it was late, it provided the unsavory option to pay to avoid additional penalty and interest, it required a response in less than two weeks, and it didn’t explain the reason I was under investigation. All I knew was I had to send supporting documentation for my tax deductions in less than thirty days. That was a real kicker because the letter was dated fifteen days before it arrived in my mailbox. Did the IRS age the stupid things prior to mailing or was that a sneaky way to narrow my response window?
The process Becke’s Spreadsheet I had developed early in my career is simple, inexpensive and became priceless for my IRS defense. My irritation didn’t hamper my immediate response. I dug through my tax receipt envelopes and pulled 2004. Within two days, I had compiled the support documentation, made copies of my receipts, and mailed my response by registered mail. At this point I was feeling cocky about the ease of my response and assumed I would soon receive a sorry-we’re-wrong letter. Does anyone need a reminder of how the word assume may be broken down?
Time passed without a response and doubt picked at the edges of my mind. What if I’d made a mistake? As if in answer to my wavering confidence, RWR published another tax advice article. With a snip of my trusty scissors, I placed Diane Kelly’s article front and center of my tax notebook. If the IRS auditor continued to question my deductions, I once again felt confident Diane’s article had armed me for a quick and merciless defense.
Again, I entered wait mode as my interest and penalty clock continued to tick off dollar signs. Worse, I’d filed yet another year with similar deductions. I now had two years of deduction jeopardy hanging in the balance.
In the following months, the IRS sent me four letters apologizing for their delays before I finally received my second denial letter. In this correspondence the auditor stated I was not regularly published and authors were not considered a trade or business. I had fifteen days to respond and set up payment.
My temper went from zero to seventy in ten seconds. If this auditor thought she could wear me down, she was in deep need of therapy! After my temper cooled, I noticed at the end of the letter, the auditor listed a phone number and an invitation to call should I have questions.
My mind pinged with questions and comments as I waited for the line to connect. Guess what? An automated voice response asked me to leave a message with a promise of a return call in twenty-four hours. Forty-eight hours later I was still waiting. At this point I don’t want to get an answer. I want to get even. Determined I would talk to a person, I called the number every hour for twenty-four hours. Ding, ding, ding! You guessed it. A living, breathing person failed to pick up the phone. However upon reflection, would a smart auditor EVER pick up the phone?
Undeterred, I searched the Internet and found the number for an audit manager from the same state as the auditor listed on my demand letter. I nearly fell over when he answered the phone. Oh boy, I had a person and I started the rant. I first questioned why my auditor letter instructed me to call a number for questions and no one picked up. The manager reported my auditor was no longer available.
Okay, I’m bad, and I couldn’t let that one go. I asked him if she’d lost her position because she didn’t understand the tax code. He wasn’t amused, but I continued. I asked why the IRS was not required to state the precise reason for the audit and why my letter arrived almost two weeks later than the letter date.
As you can tell my mouth was on a roll and my ears had pretty much shut down, so by the end of the call I was still at ground zero. However, I was way too invested to give up. After that call I sat my bum in the chair and employed the tools I’ve been developing during my tenure as an RWA member—my writing skills.
I whipped out Diane’s article on the nine factors used to differentiate a business from a hobby and crafted a defense. In my letter, I used the magic word “appeal.” Within three weeks, I approved an extension for the audit and made a request for my state office to handle my appeal. Compared to my experience with the Utah auditor, I was mildly surprised at the speed of the response from my local office. One week later my state auditor called me. Are you ready for this? The local auditor identified herself and said, “You kept sending exactly what was needed, but it didn’t change the decision. I’m really sorry.”
One month later, I received a favorable determination letter stating that my deductions had been approved and I owed no further tax.
Moral of the story: Deduct your legitimate expenses and maintain the documentation to support them. Above all, never give up and continue to do what a writer does best—write.
Becke’s Documentation Process
The IRS doesn’t mandate a precise set of documentation rules. The important point is to develop a process and stick to it. The method I developed requires a computer with Microsoft Excel (XLS), a scanner, an electronic file folder and a file basket. In XLS I created a master spreadsheet with multiple worksheets. For my folder, I created multiple subfolders and named the worksheets and matching folders with the following labels:
| Conf-works (Conference/Workshops) | Dues-fees-entries | Hardware |
| Home M-R(maintenance and repair) | Lodge (lodging) | Meals-ent (entertainment) |
| Mileage | Misc | Multi-Yr totals |
| Off-Sup (office supplies) | Post (postage) | Ref-Books(reference books) |
| Tele (telephone) | Total | Utilities |
I use the wire basket to collect receipts. Repeat after me: You must save your receipts. Once a month I go through the basket, enter the receipt date, amount, and mileage into the spreadsheet, then scan the receipt into the electronic folder.
Each worksheet has the following columns:
| OBS | DATE | AMOUNT | COLUMN | LOCATION | MILES |
Column Definitions
OBS – observation. This number matches the number I write on the hardcopy receipt.
DATE – purchase date
COMMENT – Additional information to justify the deduction, i.e. the member names of my critique group for the luncheon meeting.
LOCATION – store, restaurant where expenses where incurred
MILES – the total number of roundtrip miles. If it’s in my home base, I calculate the miles to and from my home. If at conference, it will be to and from my hotel and to and from the airport.
Mileage is a key tracking item. My mileage worksheet includes roundtrip miles from my house to a specific location. I record the odometer reading at the beginning of the trip and when I return home.
When I enter a receipt for office supplies, I tab to the mileage sheet, find the mileage to that location and add the roundtrip miles to my start trip odometer reading. This method maintains accuracy and reminds me to record the little trips I make on a daily or weekly basis. They add up in a year.
Since I use my home as my writing office, I collect receipts for utilities, home maintenance and repair bills. If the square footage of my office is twenty percent of the total square footage of the house, I deduct twenty percent of my utility and repair bills.
In addition to reference materials, I also deduct novels I purchase that have been Golden Heart winners and Rita finalists or winners. These novels provide are examples of the current market.
At the end of the year, I let XLS calculate the totals. My documentation has already been scanned. This packet is placed in a folder for my accountant.
Once you have set up your process, maintaining it only takes a few minutes a week or thirty minutes a month. If you are unlucky and receive a surprise IRS letters demanding documentation in less than two weeks, you’ll be prepared to substantiate your deductions. If you aren’t deducting your expenses, then get to work. You’ve worked hard for your money. Claim your legitimate expenses.