Developing Perspective

#149: Audits.


00:00:00   Hello and welcome to Developing Perspective, developing perspective as a podcast discussing news of no times development Apple and the like

00:00:06   I'm your host David Smith. I'm an independent iOS and Mac developer based in hernia, Virginia. This is show number

00:00:11   149 today is Thursday, October 31st developing perspective is never longer than 15 minutes. So let's get started

00:00:18   Alright, so I wasn't exactly sure what I was gonna be talking about this week

00:00:21   but after posting on Twitter recently that I had

00:00:25   survived my first

00:00:27   audit as a business owner in the seven years that I've been running a business.

00:00:31   I had an audit for the government auditor and survived it fairly unscathed.

00:00:36   I got a lot of people asking me questions about that experience, what it's like.

00:00:41   And I think generally speaking, I think there's a tremendous amount of fear and apprehension

00:00:44   that goes around with audits and auditing in general.

00:00:47   And so I figured, okay, sure, I'll talk a little bit about my experience, but more generally

00:00:51   talk about some of my philosophies and the things that I do so that I'm not as worried

00:00:56   about this type of thing. So first, it's probably good to clarify that it was not an IRS audit,

00:01:01   which is probably the most dangerous or scary thing that you could probably run into as

00:01:07   a small business owner besides being attacked by a patent troll or something like that,

00:01:11   or being sued. It's, you know, this was the, maybe the minor leagues audit. It was someone

00:01:19   from the state rather than the federal government who was coming to go through my employment

00:01:23   records and those types of things.

00:01:25   But all the same, it's still kind of a crazy thing

00:01:27   when you get a letter in the mail that says, hi,

00:01:29   we're the government, and we would like to send somebody

00:01:31   to your place of business to conduct

00:01:33   an audit of your records, books, and make sure everything's

00:01:35   in compliance.

00:01:36   I do believe the most comical part, though,

00:01:39   is at the end of the letter, it's

00:01:41   like we look forward to opening the lines of communication

00:01:44   between us or something like that.

00:01:46   Great, yes.

00:01:47   These are lines of communication that I definitely

00:01:49   want to make sure are wide open and information freely flowing.

00:01:53   But overall, it wasn't too bad.

00:01:54   Basically, the auditor came to my house,

00:01:57   and we went through all a bunch of records,

00:01:59   you know, basically essentially making sure

00:02:01   that everything we'd submitted matched up,

00:02:02   and we had backing evidence for it going through my ledger,

00:02:05   and all these kinds of things.

00:02:07   But generally speaking, taking a step back, I mean,

00:02:09   I certainly-- I think everybody--

00:02:11   the fear of the audit is mostly just

00:02:13   that it's one of the few times there could

00:02:15   be dramatic consequences.

00:02:17   Taxes are probably the single largest expense

00:02:20   that my business has, if you look at it that way,

00:02:22   in terms of probably whatever it is, 30%, 40%, 50% of the revenue I make ultimately

00:02:27   will go into some kind of tax, whether that's federal tax, state taxes, employment taxes,

00:02:35   the government required insurance programs, et cetera.

00:02:38   So there's all kinds of things that-- there's a tremendous amount of money at stake, I suppose.

00:02:43   And that's why I think we all fear getting audited.

00:02:47   Because if we're doing something wrong, intentionally or not intentionally, it could come back to

00:02:51   bite us in a very dramatic way. But overall, the way the best way that I found to kind

00:02:57   of deal with this, and this is something that I said, I've been in business for about seven

00:02:59   years now. And so it's something I've had to deal with over time, is I've found people

00:03:05   who I know and trust and whose work I really, you know, sort of sort of know who know, I

00:03:10   can who I know, can do work at a higher level than I could personally. And they take care

00:03:15   of a lot of these types of things. And so this is I have, I have an accountant, I have

00:03:19   I have a lawyer, and I have someone who does operations and bookkeeping for me.

00:03:23   And those three people in aggregate kind of give me a lot of peace of mind and sanity

00:03:28   around these types of things.

00:03:29   So in this case, I mean, I got the letter in the mail, and the first thing I do is I

00:03:33   take it to Jess, who does my operations for me.

00:03:35   And I say, "Hey, we got this letter in the mail from an auditor.

00:03:38   Can you take care of it?"

00:03:39   And there's a tremendous amount of peace of mind that comes from knowing that she was

00:03:43   then going to go and she went and read through it, talked to our accountant, they met up,

00:03:47   So I did all the work and all the back and forth,

00:03:52   and the data collection and all the stuff

00:03:55   that needed to be happening to get ready for this audit.

00:03:57   And so then essentially what I did is I just showed up

00:03:59   and I'm the business owner.

00:04:01   We had a little bit of a few minutes of discussion

00:04:02   prior to the meeting to make sure I knew

00:04:05   kind of generally what we were doing.

00:04:07   But after I got the thumbs up from Jess

00:04:08   that everything was going to be fine

00:04:11   and everything did look normal

00:04:12   and it was probably just going to be a no change audit.

00:04:13   That was me sorted and I could go back to focusing

00:04:14   things that I actually care about.

00:04:16   Which for me mostly is writing code and making applications and developing systems and those

00:04:20   types of things.

00:04:22   And this is one thing that is a recurring theme if you've been listening to the show

00:04:25   for a while that I talk about many times.

00:04:28   And it's the importance if you want to make a run at building a business as a software

00:04:35   developer, whether that's in the app store, whether that's in services, and whatever that

00:04:39   is, you really need to treat it like a business and not overestimate your own abilities in

00:04:45   areas that you may be even potentially able to manage just fine in your personal life.

00:04:51   So if you're someone who does your own taxes, you do your own bookkeeping, you do all these

00:04:54   kinds of things for your own personal side, it's a different kind of ballgame when you're

00:04:58   doing it for a business. And if not just because of the rules are different, and business accounting

00:05:05   and bookkeeping is more complicated and more, or has a lot more nuance to it than your personal

00:05:11   finances do almost certainly. But I'd say even moreover, there's a lot more, you know,

00:05:15   there's much more riding on you getting it right. There's a lot more, you know, and potentially

00:05:21   many other people are going to be dependent on you getting it right. And so I want to

00:05:26   infer and additionally, then perhaps even more importantly, in your ability to do it,

00:05:31   And your ability for your business to function

00:05:34   is often going to be dependent on your ability

00:05:37   to focus on the actual work that you want to do.

00:05:39   And I know that if I didn't outsource or find people who

00:05:44   could do these jobs for me, I just

00:05:46   wouldn't be able to get anything done.

00:05:48   I'd be spending all my time in QuickBooks,

00:05:50   in Excel, in TurboTax, and whatever

00:05:52   it is that I need to do to actually do all these things.

00:05:56   It would take me longer than they take for someone else

00:05:58   to do them, probably.

00:05:59   And it's time that I can't be spending on the things

00:06:01   I actually need to do. Now, that's not to say that I you want to be get to a point that

00:06:06   you have no understanding or control over what's going on. One of the things that I

00:06:09   like is to try and those to try and find that line in between where I understand generally

00:06:16   at a high level, all of what we're doing, the decisions we're making the, you know,

00:06:20   and I sit down with my accountant at the end of the year to talk about tax planning and

00:06:23   some of the things that are going on and you know, whatever specific, you know, sort of

00:06:27   the one-off or kind of oddball deductions or things that I end up choosing and taking,

00:06:33   I want to understand all of those. Not necessarily at the level of my accountant or at my operations

00:06:37   person, but I want to understand what's going on and be able to make decisions about it.

00:06:41   So it's not sort of this blind, throwing the books over the wall kind of approach. But

00:06:46   the goal is that I don't have to do any of the day-to-day. I don't have to do any of

00:06:50   the nuts and bolts and the nitty-gritty of doing this. I have someone else who can do

00:06:55   who does it way better than I do.

00:06:56   He just does my books.

00:06:58   And I used to do them for the first couple

00:07:00   of years of running my business.

00:07:01   I used to do it myself.

00:07:02   And the accuracy and the quality of the result

00:07:05   is much higher now than it used to be

00:07:07   as a result of essentially hiring a professional

00:07:10   to take care of it.

00:07:11   And so that's just one thing that it has overall.

00:07:14   When I got this audit letter, it wasn't actually too scary

00:07:16   because I knew that there wasn't going

00:07:19   to be any major surprises.

00:07:22   Obviously, the risk with an audit,

00:07:23   I suppose is you never really know 100%, but I was as sure as I could be.

00:07:27   And I was more sure than if I'd been doing things myself, because there's other people

00:07:30   who are taking a look at it and who are, you know, sort of have much more expertise in

00:07:34   this area.

00:07:35   And then probably the next thing to talk about is at a high level, kind of my philosophy

00:07:40   with a lot of these things is there's probably sort of two ways that you can really run a

00:07:47   business or in general approach things like taxes.

00:07:50   And you can be on the conservative side, where you're potentially leaving money on the table

00:07:56   in terms of deductions or opportunities or things that you could take advantage of but

00:08:01   aren't.

00:08:02   Or on the flip side, you can be incredibly aggressive.

00:08:05   And these are the people who are taking advantage of every possible loophole, every possible

00:08:09   advantage, every deduction that you could imagine.

00:08:12   And as a result, they're saving money on their taxes.

00:08:16   And for me, I've always sort of ended up in the place of I take advantage of the things

00:08:22   that are straightforward and obvious, and there's not a lot of wiggle room or gray area

00:08:26   or anything in between.

00:08:27   But generally speaking, I don't do any of the things where it starts to get squishy,

00:08:32   where it starts to get into gray areas or places where you could interpret a rule or

00:08:37   interpret a deduction's eligibility in multiple ways.

00:08:42   And that just ultimately, I guess I'm potentially losing a little bit of money in that process,

00:08:47   but ultimately I feel much better about it.

00:08:52   That I understand all the deductions I take.

00:08:55   I think they're all straightforward.

00:08:57   I think they're all above board.

00:08:58   And if I were ever to get the big IRS audit, if that ever came down,

00:09:01   I wouldn't be too worried about the implications of that.

00:09:06   In that I understand the things that they could disallow

00:09:10   the errors of things that they could find would be relatively minor.

00:09:14   Maybe it's things like, "I can't find the receipt for a meal I had two years ago."

00:09:17   Those types of things that if ultimately they disallowed that meal, it's not too bad.

00:09:22   But I'm not taking these huge structural things where you could potentially be on the hook

00:09:29   for huge sums of money.

00:09:31   And that's just a philosophy and it's a choice that you have to make.

00:09:36   The funny thing with taxes is, as I always say,

00:09:38   there's a thing called tax avoidance,

00:09:40   and there's a thing called tax evasion.

00:09:42   One of those is a crime, and the other one isn't.

00:09:46   But tax avoidance can be a very dangerous game,

00:09:48   and ultimately be something that you just spend far too much

00:09:50   time worrying about.

00:09:51   I'd rather spend that time worrying

00:09:52   about making my products better, which is ultimately

00:09:54   going to make me more money by growing it that way.

00:09:57   And it's ultimately going to make me feel much more

00:09:58   confident about it.

00:09:59   I just don't want to have to think

00:10:00   about all the complexities and all the things that

00:10:03   goes along with this.

00:10:04   And as an example-- and this is mostly just relevant for people

00:10:07   in the States--

00:10:09   one of these kind of programs is the classic, the home office

00:10:12   deduction.

00:10:13   So I work from home most days.

00:10:15   I have an office sometimes that I go to.

00:10:17   But generally, I work from home.

00:10:18   But I don't take the home office deduction.

00:10:20   And that's because the home office deduction,

00:10:22   while it would be great to be able to essentially deduct

00:10:25   and depreciate a certain amount of my home, my mortgage

00:10:29   and my utilities and my internet costs

00:10:31   and all these kinds of things, the actual rules,

00:10:33   you read them are incredibly stringent for what space would be eligible for that. And

00:10:39   you know, I'm not an accountant, I'm not a lawyer. But as far as I can understand, you

00:10:42   know, that space has to be used exclusively for work. And that when they say exclusive,

00:10:47   they meet 100%. They don't mean 99%. They don't mean 90%. They mean used for business

00:10:52   100% of the time. And that's basically an impossible bar, you know, in terms of just

00:10:59   living life, even if I only ever go in there to work,

00:11:04   defining something as I've never done anything

00:11:08   that wasn't work-related while I was sitting in that chair,

00:11:10   gets a little bit complicated.

00:11:13   Is talking on Twitter work?

00:11:14   Is it not?

00:11:15   Or is, who knows what?

00:11:16   You can get into all this kind of crazy nuance

00:11:18   that it's like, you know, it'd be great to get

00:11:21   that deduction, I suppose, but I just don't want to

00:11:23   increase my risk of being audited.

00:11:26   I was having a discussion with my accountant

00:11:26   just as just briefly as part of this audit.

00:11:28   And she was talking about some of the things that,

00:11:30   you know, depending on how you structure your taxes,

00:11:34   and the deductions you take and the choices you make

00:11:37   can actually have a tangible impact on your likelihood

00:11:40   of even being audited.

00:11:41   And so the funny thing is you could potentially

00:11:44   be saving all this money by trying to get fast and loose

00:11:48   or clever with your taxes.

00:11:49   But ultimately, you may not even end up saving money

00:11:52   because an audit, even a small audit like the one I just had,

00:11:55   It was very expensive in terms of the time I had to buy

00:12:00   for my accountant, for my operations person, my own time,

00:12:04   in terms of, it probably took about half a day out

00:12:06   of my schedule, which has a tangible and real cost

00:12:10   that I have to make up on the flip side.

00:12:13   But yeah, so that's kind of the, at a high level,

00:12:16   how I think about these things, and how I think in general

00:12:19   I'd recommend that if you're starting out with a business,

00:12:22   do things simple, do things, if you don't understand it,

00:12:22   in terms of this is probably good advice generally for investments too. It's like if you don't

00:12:25   fully understand it, don't do it. Even if your accountant says that you can or your

00:12:30   financial advisor says that you should. Ultimately you need to understand and be comfortable

00:12:35   with everything. And so you hire somebody who has like-minded philosophies who you trust,

00:12:42   who you think will do a good job and then have them make good consistent conservative

00:12:47   choices. And for me that's what I found to work really well. I've been doing this I said

00:12:51   about seven years now, I think.

00:12:53   I haven't had any big problems with accounting,

00:12:55   haven't had any big bookkeeping things as a result, which

00:12:59   is not a small feat in and of itself.

00:13:02   So that's it.

00:13:03   That was the not so exciting story about my audit.

00:13:06   Ultimately, nothing went well.

00:13:08   It's good when you finish an audit,

00:13:10   and the guy's just like, all right, thanks.

00:13:11   Thanks for your time.

00:13:12   And off he goes.

00:13:13   But overall, if you're confident in the choices

00:13:19   making as you go.

00:13:20   There's a lot less to worry about on the backend if you ever are audited.

00:13:23   All right, so that's it for today's show.

00:13:26   As always, if you have questions, comments, concerns, or complaints, I'm on Twitter @_DavidSmith,

00:13:29   David@DevelopmentPerspective.com.

00:13:30   Otherwise, if you have a great weekend, happy coding, and I will see you next week.