CASE STUDY: Pet Sitter Audit on Home Expenses and Mileage Reports

In our Case Study Audit series we will go under the hood of pet sitting businesses and do what no one else is doing in the industry. Find out why companies were audited, how they survived, and their reflections looking back. We are so thankful to these companies for helping us to put truth to all of the rumors that fly around.

Our first interviewee is Mary Anne Johndrow from Daily Leash. She was actually audited on two separate occasions and discusses them below:

BEFORE THE AUDIT:

Do you want this to be anonymous or do you mind telling who you are? Sure!

If yes, what is your name and company name? Mary Anne Johndrow-Daily Leash

When did you start your business?  1986-1998, then restarted 2007-now.

Tell us if you had legal council advise you on how to set up and what was right and proper (accountant and lawyer) No, but I have a background in bookkeeping.

Approximately, what was your annual revenue at the time?  Alternatively, would you consider yourself a small (Under 100K) medium (100-250K) or large (250K+) company?   $60K

How long did you have staff and what made you choose that classification of workers?  I started with staff in 2008, after my audits.

Were you ever afraid of being audited? Was it ever in the back of your mind? Yes, always worried about making an expensive mistake.

TELL ME ABOUT YOUR AUDIT:

How were you notified that you were being audited? What department audited you? How long did the entire process take?

[I was audited twice] The first time I received a notice in the mail. It indicated a date to come to the IRS office, and the tax year they were going to examine. It took me many hours to assemble everything I needed (this was before I used a computer-everything was paper and 13 column sheets! I estimate I was in their office for 3 hours.)

The second time I already had all my ducks in a row. I received an IRS notice in the mail that they wanted back-up for a couple of expenses on my schedule C. This time I mailed copies of everything to the IRS office. Weeks later I received a notice that they found everything in order.

What was their reasoning for auditing you? They didn’t indicate a reason either time – they just requested my books, and then requested my expense back-up.

Tell us about the help that you had going through the audit. Did your lawyer, accountant, another agency/advisor help guide you through it? No help – I went by myself.

What did they require from you throughout the audit?  They wanted to see back-up for my schedule C expenses – and they even added everything up to be sure it equaled what I claimed.

How did you feel throughout the process? What impact did it have on your life? Your family? Your business? The first time I was terrified. It took up a lot of my time, and my peace of mind. I was single then, and I stilled worked as I had been.

When you submitted the evidence they requested, how sure were you that you were going to pass through with flying colors?The first time I was not sure I would pass with flying colors, but the second time was not as worrisome because they only wanted to examine specific expenses.

AFTER THE AUDIT:

What was the finding of the audit? They disallowed some of my home office expenses, and then disallowed about $300 worth of mileage expenses.

What to do attribute to the findings? Good defense? Bad record keeping? Out of compliance? Etc?  I did have all my records, and I could discuss any of my company’s expenses. At the time I did not know I couldn’t deduct part of a room for a home office, and I did not know I could not count mileage from home to the first client of the day, and the mileage home from the last client of the day (commuting miles).

If you had to make changes, how did you go about making them and what were they?  I dedicated a whole room to my office, and I changed how I recorded my mileage.

Did you have to pay back taxes, penalties, fines, interest, etc? How were you able to afford it all? How long did you have to pay them? Yes I owed the IRS about $500 and I just paid it. A couple years later I fell behind on my taxes, and it really snowballed into an overwhelming problem. My bank account was regularly levied, and I struggled to pay $200/month back with mounting fines and interest. Finally I submitted an Offer in Compromise and was able to wipe it all clean for about 10% of the total debt – NEVER AGAIN!!

Tell me about how you feel about that audit now. Are you happy or sad that you went through it? Did it make you better? I am happy that I went through with it. It was a hard lesson, but now I know an audit won’t kill me.

What advice would you give to other pet sitters to try NOT to be audited? Keep detailed records of every expense you plan to deduct. Keep your income higher than your expenses (not everyone does this amazingly). Keep up to date with the expenses that are allowed by the IRS – there is so much information available on IRS.gov!

What do you think is the biggest misconception you see being passed around about being audited?  That it means you have done something wrong. You may have been picked randomly, or your return is out of the ordinary.

If you knew then, what you knew now, is there anything you would have done differently? Well I wouldn’t have stressed as much! I would also have educated myself better on what is allowed as business expenses.

Anything else you would like to add?  Keep everything organized – know your numbers – make sure someone else can easily understand your books. If you are sitting in an audit – give them what they ask for, nothing more, and don’t chat. You may say something that leads them down another bunny trail into your books.

MY REFLECTIONS:

First, I was shocked to see that she had been audited twice. Although, as you will see in an audit that will post next week, it isn’t uncommon to be audited AGAIN after you are audited the first time.

I think the part about having good records is defiantly something that you will see as a trend through these case studies.  It makes me think about the pet sitters who do their own taxes and “what if” they make a mistake? Checks and balances and holding onto the records. I know that each year my book keeper gives me a 3 inch binder of all the hard documents printed out from the year. Knowing things like exactly who you met at a business meeting, or which employee you took out for a meal (aka receipts) are important things to track. That could  be a tall order for a business owner who is overwhelmed with all the other aspects of running a successful business.

Sound off below. How do you keep you records? Would you be confident or scared if this happened to you? Don’t forget to also thank Mary Anne for her time and honesty to help shed some light on this important topic! 🙂

 

 

8 replies
  1. Jennifer Haralson
    Jennifer Haralson says:

    Thanks Mary Anne! Were you not able to count mileage to and from your first pet sit because they found you didn’t have a “real home office?” Were those two things related or not?
    I’ve been more relaxed about mileage logs for myself lately and this will kick me back into gear!

    Reply
  2. Megan
    Megan says:

    Audits are definitely scary but not always bad. My Father was audited. He is not a good record keeper. However, the IRS determined that THEY owed him $20 something bucks. Thanks Mary Anne.

    Reply
  3. Kelly Hall
    Kelly Hall says:

    Thank you so much Mary Anne and Bella for putting this together for us. I find that I get confusing messages about how to properly do things. I have NO skills in bookkeeping and I did my own paperwork (yes, ALL paper – no computer system) for the first several years. I kept every invoice, copy of checks from clients, every receipt and expense, copies of all my deposit slips with copies of the checks, recorded my mileage on a daily basis and kept a log. My first tax person said I kept excellent records and that rarely had she seen anyone do a daily log of every pet sit. I now have a bookkeeper doing Quick Books for me and a CPA. I still keep paperwork in binders until I learn to do the Quick Books myself. I do track mileage from/back to home since I have home office.

    Reply
    • Bella Vasta
      Bella Vasta says:

      Kelly,

      I am sorry that it took me a bit to get back to you. I JUST saw this!!!
      It sounds like you are on the right track! Keeping good records is something that every business owner needs to do. That is awesome that you have a bookkeeper. They give so much peace of mind, right? Perhaps they can teach you what they do so eventually you put them out of a job? 🙂 Keep me posted, ok?

      Reply
  4. Karla
    Karla says:

    I use my car for business and very little mileage for personal. I log the miles but not for each sit. When I go on personal time I log the mileage then when I am back on business time I log the miles. out of over 20,000 miles a year I only use the car for personal maybe 1500 miles. I have been told I keep good records but now I’m not so sure.

    Reply
    • Barbara
      Barbara says:

      I’m curious about this, too. I use my car almost exclusively for business, but like you, I occasionally put maybe 1000 miles per year on it for personal use, and I deduct that from the total miles when I hand my books over to my cpa.

      Reply

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  1. […] also kept great records and was able to weed through and produce everything the auditors asked for. Mary Anne also kept meticulous records and was able to pull up the exact records that were […]

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