I attended a meeting a ‘BigLaw’ firm in downtown Des Moines recently. Around the table were multiple attorneys, advisors, a CEO, and others. The individuals gathered were, in their respective positions, accomplished, diligent, and eloquent. When they spoke, it was with the air of confidence that comes from experience and success. To call it a ‘power meeting’ does not do it justice.
As the meeting went on, words such as ‘debt instrument,’ ‘foreclosure,’ ‘tax obligations,’ and ‘exit strategy’ were bandied about. Millions of dollars were at issue. Each individual around the table talked of the money in hard, cold figures.
Something was conspicuously missing, though. It something was missed by each and every other professional at that meeting. That something was pride. Not the pride of ego, but the pride of accomplishment. The pride of knowing that a person’s labor, experience, knowledge, and judgment had made a difference; not just in their own life, but in the lives of their family and the companies they work for. Pride is something that is extremely hard to reduce to simple numbers; but it is equally as hard to argue that such pride has no value.
I’ve come to learn that there are certain documents that act as mirrors and reflecting pools. Documents that, when viewed, tend to turn one’s thoughts to the past, of jobs, work done, tasks accomplished, and victories celebrated. One of those documents is a person’s first Social Security check. Another is a Notice of Audit. It is a document that can be confusing, and many regard a Notice of Audit with… hostile… reactions.
There are a few basic types of audit. Most common is a correspondence audit. In these types of audits, the IRS or state taxing agency needs more information about a certain issue to understand why a business or taxpayer did what they did on their return. Generally, these types of audits, once we have secured the issue the audit is regarding, are disposed of fairly quickly. The second type, the office audit, is a riskier. This type of audit is conducted in the office of the auditing agency (IRS, IDOR, etc.), and generally seeks documentary information as well as answers to questions by the auditing agent. The third type is a Random Audit. These audits occur ‘randomly’ and are not necessarily triggered by any one specific thing. However, the auditing agency will review the entire return, and this can lead to other actions by the agency such as Assessments and Collections Actions. The fourth, and most serious, type of audit is the field audit. When this type of audit occurs, agents will come to your business or home (as applicable to the type of return you file), and will help themselves to your information. This is not a friendly situation.
What do all of these types of audits have in common? Your accomplishments, and the financial steps you had to take to achieve those accomplishments, are called into question. You have to justify what you did and the financial effect of getting done what you did. The hardest part about that is that you have to justify your actions to people who don’t, and most likely never have, worked in your industry. It’s a lot like Monday-morning-quarterbacking. Except the agency questioning you has the power to issue Tax Liens, Garnishments on your income, Levies on your bank accounts, and in extreme cases, sue you or accuse you of a tax crime.
The money we expend on our businesses is often industry-specific. True, most businesses spend money on electricity, gas, insurance, and the like. But, for example, how does a towing business explain to a suit-and-tie wearing IRS auditor the amount of money you spend on flashlights isn’t so much so you can see, but so the cars going down the interstate at 75 or 80 mph can see you while you’re picking up the impounded car off the side of the road that law enforcement called you at 2:30am to tow into the impound lot? How do you explain that the money you spent on good chains is so the Yukon Denali XL with 400 miles on it doesn’t shift while you’re turning and break the chains that are holding to down so it doesn’t go careening off your flatbed and into traffic?
Our work is often an extension of us. Our work ethic, dedication, judgment, experience, and effort have results that makes lives better. We are proud of the work we’ve accomplished, and that pride is, in part, what makes up who we are as humans. When a Tax Audit Notice comes, though, it feels like an assault on our accomplishments. Our work, and what we had to do to financially to accomplish it, is being called into question. So, often, even though we speak of cold, hard numbers during an audit, we are often left to ask: How do you value pride?
In the meeting I wrote about a moment ago, the comment about pride I made was lost to the staleness of spreadsheets. It is not an issue that will go unnoticed or undealt-with, though. To allow it to be disregarded by other professionals would be a disservice. I often address the issue of pride during those times when it is called into question, as I feel it rightfully should. Sadly, I find it to be an issue that the ‘other side’ is unprepared to speak of. When I explore the issue, though, it is one that the ‘other side’ cannot deny. It exists not on spreadsheets and tax returns, but rather in the nature of the work, and the people doing that work, itself.
If you receive a Notice of Audit, no matter your industry or the nature of your work, let’s ask: How do you value pride?