0:00:00Hello and welcome to Developing Perspective, developing perspective as a podcast discussing news of no times development Apple and the like
0:00:06I'm your host David Smith. I'm an independent iOS and Mac developer based in hernia, Virginia. This is show number
0:00:11149 today is Thursday, October 31st developing perspective is never longer than 15 minutes. So let's get started
0:00:18Alright, so I wasn't exactly sure what I was gonna be talking about this week
0:00:21but after posting on Twitter recently that I had
0:00:25survived my first
0:00:27audit as a business owner in the seven years that I've been running a business.
0:00:31I had an audit for the government auditor and survived it fairly unscathed.
0:00:36I got a lot of people asking me questions about that experience, what it's like.
0:00:41And I think generally speaking, I think there's a tremendous amount of fear and apprehension
0:00:44that goes around with audits and auditing in general.
0:00:47And so I figured, okay, sure, I'll talk a little bit about my experience, but more generally
0:00:51talk about some of my philosophies and the things that I do so that I'm not as worried
0:00:56about this type of thing. So first, it's probably good to clarify that it was not an IRS audit,
0:01:01which is probably the most dangerous or scary thing that you could probably run into as
0:01:07a small business owner besides being attacked by a patent troll or something like that,
0:01:11or being sued. It's, you know, this was the, maybe the minor leagues audit. It was someone
0:01:19from the state rather than the federal government who was coming to go through my employment
0:01:23records and those types of things.
0:01:25But all the same, it's still kind of a crazy thing
0:01:27when you get a letter in the mail that says, hi,
0:01:29we're the government, and we would like to send somebody
0:01:31to your place of business to conduct
0:01:33an audit of your records, books, and make sure everything's
0:01:35in compliance.
0:01:36I do believe the most comical part, though,
0:01:39is at the end of the letter, it's
0:01:41like we look forward to opening the lines of communication
0:01:44between us or something like that.
0:01:46Great, yes.
0:01:47These are lines of communication that I definitely
0:01:49want to make sure are wide open and information freely flowing.
0:01:53But overall, it wasn't too bad.
0:01:54Basically, the auditor came to my house,
0:01:57and we went through all a bunch of records,
0:01:59you know, basically essentially making sure
0:02:01that everything we'd submitted matched up,
0:02:02and we had backing evidence for it going through my ledger,
0:02:05and all these kinds of things.
0:02:07But generally speaking, taking a step back, I mean,
0:02:09I certainly-- I think everybody--
0:02:11the fear of the audit is mostly just
0:02:13that it's one of the few times there could
0:02:15be dramatic consequences.
0:02:17Taxes are probably the single largest expense
0:02:20that my business has, if you look at it that way,
0:02:22in terms of probably whatever it is, 30%, 40%, 50% of the revenue I make ultimately
0:02:27will go into some kind of tax, whether that's federal tax, state taxes, employment taxes,
0:02:35the government required insurance programs, et cetera.
0:02:38So there's all kinds of things that-- there's a tremendous amount of money at stake, I suppose.
0:02:43And that's why I think we all fear getting audited.
0:02:47Because if we're doing something wrong, intentionally or not intentionally, it could come back to
0:02:51bite us in a very dramatic way. But overall, the way the best way that I found to kind
0:02:57of deal with this, and this is something that I said, I've been in business for about seven
0:02:59years now. And so it's something I've had to deal with over time, is I've found people
0:03:05who I know and trust and whose work I really, you know, sort of sort of know who know, I
0:03:10can who I know, can do work at a higher level than I could personally. And they take care
0:03:15of a lot of these types of things. And so this is I have, I have an accountant, I have
0:03:19I have a lawyer, and I have someone who does operations and bookkeeping for me.
0:03:23And those three people in aggregate kind of give me a lot of peace of mind and sanity
0:03:28around these types of things.
0:03:29So in this case, I mean, I got the letter in the mail, and the first thing I do is I
0:03:33take it to Jess, who does my operations for me.
0:03:35And I say, "Hey, we got this letter in the mail from an auditor.
0:03:38Can you take care of it?"
0:03:39And there's a tremendous amount of peace of mind that comes from knowing that she was
0:03:43then going to go and she went and read through it, talked to our accountant, they met up,
0:03:47So I did all the work and all the back and forth,
0:03:52and the data collection and all the stuff
0:03:55that needed to be happening to get ready for this audit.
0:03:57And so then essentially what I did is I just showed up
0:03:59and I'm the business owner.
0:04:01We had a little bit of a few minutes of discussion
0:04:02prior to the meeting to make sure I knew
0:04:05kind of generally what we were doing.
0:04:07But after I got the thumbs up from Jess
0:04:08that everything was going to be fine
0:04:11and everything did look normal
0:04:12and it was probably just going to be a no change audit.
0:04:13That was me sorted and I could go back to focusing
0:04:14things that I actually care about.
0:04:16Which for me mostly is writing code and making applications and developing systems and those
0:04:20types of things.
0:04:22And this is one thing that is a recurring theme if you've been listening to the show
0:04:25for a while that I talk about many times.
0:04:28And it's the importance if you want to make a run at building a business as a software
0:04:35developer, whether that's in the app store, whether that's in services, and whatever that
0:04:39is, you really need to treat it like a business and not overestimate your own abilities in
0:04:45areas that you may be even potentially able to manage just fine in your personal life.
0:04:51So if you're someone who does your own taxes, you do your own bookkeeping, you do all these
0:04:54kinds of things for your own personal side, it's a different kind of ballgame when you're
0:04:58doing it for a business. And if not just because of the rules are different, and business accounting
0:05:05and bookkeeping is more complicated and more, or has a lot more nuance to it than your personal
0:05:11finances do almost certainly. But I'd say even moreover, there's a lot more, you know,
0:05:15there's much more riding on you getting it right. There's a lot more, you know, and potentially
0:05:21many other people are going to be dependent on you getting it right. And so I want to
0:05:26infer and additionally, then perhaps even more importantly, in your ability to do it,
0:05:31And your ability for your business to function
0:05:34is often going to be dependent on your ability
0:05:37to focus on the actual work that you want to do.
0:05:39And I know that if I didn't outsource or find people who
0:05:44could do these jobs for me, I just
0:05:46wouldn't be able to get anything done.
0:05:48I'd be spending all my time in QuickBooks,
0:05:50in Excel, in TurboTax, and whatever
0:05:52it is that I need to do to actually do all these things.
0:05:56It would take me longer than they take for someone else
0:05:58to do them, probably.
0:05:59And it's time that I can't be spending on the things
0:06:01I actually need to do. Now, that's not to say that I you want to be get to a point that
0:06:06you have no understanding or control over what's going on. One of the things that I
0:06:09like is to try and those to try and find that line in between where I understand generally
0:06:16at a high level, all of what we're doing, the decisions we're making the, you know,
0:06:20and I sit down with my accountant at the end of the year to talk about tax planning and
0:06:23some of the things that are going on and you know, whatever specific, you know, sort of
0:06:27the one-off or kind of oddball deductions or things that I end up choosing and taking,
0:06:33I want to understand all of those. Not necessarily at the level of my accountant or at my operations
0:06:37person, but I want to understand what's going on and be able to make decisions about it.
0:06:41So it's not sort of this blind, throwing the books over the wall kind of approach. But
0:06:46the goal is that I don't have to do any of the day-to-day. I don't have to do any of
0:06:50the nuts and bolts and the nitty-gritty of doing this. I have someone else who can do
0:06:55who does it way better than I do.
0:06:56He just does my books.
0:06:58And I used to do them for the first couple
0:07:00of years of running my business.
0:07:01I used to do it myself.
0:07:02And the accuracy and the quality of the result
0:07:05is much higher now than it used to be
0:07:07as a result of essentially hiring a professional
0:07:10to take care of it.
0:07:11And so that's just one thing that it has overall.
0:07:14When I got this audit letter, it wasn't actually too scary
0:07:16because I knew that there wasn't going
0:07:19to be any major surprises.
0:07:22Obviously, the risk with an audit,
0:07:23I suppose is you never really know 100%, but I was as sure as I could be.
0:07:27And I was more sure than if I'd been doing things myself, because there's other people
0:07:30who are taking a look at it and who are, you know, sort of have much more expertise in
0:07:34this area.
0:07:35And then probably the next thing to talk about is at a high level, kind of my philosophy
0:07:40with a lot of these things is there's probably sort of two ways that you can really run a
0:07:47business or in general approach things like taxes.
0:07:50And you can be on the conservative side, where you're potentially leaving money on the table
0:07:56in terms of deductions or opportunities or things that you could take advantage of but
0:08:01aren't.
0:08:02Or on the flip side, you can be incredibly aggressive.
0:08:05And these are the people who are taking advantage of every possible loophole, every possible
0:08:09advantage, every deduction that you could imagine.
0:08:12And as a result, they're saving money on their taxes.
0:08:16And for me, I've always sort of ended up in the place of I take advantage of the things
0:08:22that are straightforward and obvious, and there's not a lot of wiggle room or gray area
0:08:26or anything in between.
0:08:27But generally speaking, I don't do any of the things where it starts to get squishy,
0:08:32where it starts to get into gray areas or places where you could interpret a rule or
0:08:37interpret a deduction's eligibility in multiple ways.
0:08:42And that just ultimately, I guess I'm potentially losing a little bit of money in that process,
0:08:47but ultimately I feel much better about it.
0:08:52That I understand all the deductions I take.
0:08:55I think they're all straightforward.
0:08:57I think they're all above board.
0:08:58And if I were ever to get the big IRS audit, if that ever came down,
0:09:01I wouldn't be too worried about the implications of that.
0:09:06In that I understand the things that they could disallow
0:09:10the errors of things that they could find would be relatively minor.
0:09:14Maybe it's things like, "I can't find the receipt for a meal I had two years ago."
0:09:17Those types of things that if ultimately they disallowed that meal, it's not too bad.
0:09:22But I'm not taking these huge structural things where you could potentially be on the hook
0:09:29for huge sums of money.
0:09:31And that's just a philosophy and it's a choice that you have to make.
0:09:36The funny thing with taxes is, as I always say,
0:09:38there's a thing called tax avoidance,
0:09:40and there's a thing called tax evasion.
0:09:42One of those is a crime, and the other one isn't.
0:09:46But tax avoidance can be a very dangerous game,
0:09:48and ultimately be something that you just spend far too much
0:09:50time worrying about.
0:09:51I'd rather spend that time worrying
0:09:52about making my products better, which is ultimately
0:09:54going to make me more money by growing it that way.
0:09:57And it's ultimately going to make me feel much more
0:09:58confident about it.
0:09:59I just don't want to have to think
0:10:00about all the complexities and all the things that
0:10:03goes along with this.
0:10:04And as an example-- and this is mostly just relevant for people
0:10:07in the States--
0:10:09one of these kind of programs is the classic, the home office
0:10:12deduction.
0:10:13So I work from home most days.
0:10:15I have an office sometimes that I go to.
0:10:17But generally, I work from home.
0:10:18But I don't take the home office deduction.
0:10:20And that's because the home office deduction,
0:10:22while it would be great to be able to essentially deduct
0:10:25and depreciate a certain amount of my home, my mortgage
0:10:29and my utilities and my internet costs
0:10:31and all these kinds of things, the actual rules,
0:10:33you read them are incredibly stringent for what space would be eligible for that. And
0:10:39you know, I'm not an accountant, I'm not a lawyer. But as far as I can understand, you
0:10:42know, that space has to be used exclusively for work. And that when they say exclusive,
0:10:47they meet 100%. They don't mean 99%. They don't mean 90%. They mean used for business
0:10:52100% of the time. And that's basically an impossible bar, you know, in terms of just
0:10:59living life, even if I only ever go in there to work,
0:11:04defining something as I've never done anything
0:11:08that wasn't work-related while I was sitting in that chair,
0:11:10gets a little bit complicated.
0:11:13Is talking on Twitter work?
0:11:14Is it not?
0:11:15Or is, who knows what?
0:11:16You can get into all this kind of crazy nuance
0:11:18that it's like, you know, it'd be great to get
0:11:21that deduction, I suppose, but I just don't want to
0:11:23increase my risk of being audited.
0:11:26I was having a discussion with my accountant
0:11:26just as just briefly as part of this audit.
0:11:28And she was talking about some of the things that,
0:11:30you know, depending on how you structure your taxes,
0:11:34and the deductions you take and the choices you make
0:11:37can actually have a tangible impact on your likelihood
0:11:40of even being audited.
0:11:41And so the funny thing is you could potentially
0:11:44be saving all this money by trying to get fast and loose
0:11:48or clever with your taxes.
0:11:49But ultimately, you may not even end up saving money
0:11:52because an audit, even a small audit like the one I just had,
0:11:55It was very expensive in terms of the time I had to buy
0:12:00for my accountant, for my operations person, my own time,
0:12:04in terms of, it probably took about half a day out
0:12:06of my schedule, which has a tangible and real cost
0:12:10that I have to make up on the flip side.
0:12:13But yeah, so that's kind of the, at a high level,
0:12:16how I think about these things, and how I think in general
0:12:19I'd recommend that if you're starting out with a business,
0:12:22do things simple, do things, if you don't understand it,
0:12:22in terms of this is probably good advice generally for investments too. It's like if you don't
0:12:25fully understand it, don't do it. Even if your accountant says that you can or your
0:12:30financial advisor says that you should. Ultimately you need to understand and be comfortable
0:12:35with everything. And so you hire somebody who has like-minded philosophies who you trust,
0:12:42who you think will do a good job and then have them make good consistent conservative
0:12:47choices. And for me that's what I found to work really well. I've been doing this I said
0:12:51about seven years now, I think.
0:12:53I haven't had any big problems with accounting,
0:12:55haven't had any big bookkeeping things as a result, which
0:12:59is not a small feat in and of itself.
0:13:02So that's it.
0:13:03That was the not so exciting story about my audit.
0:13:06Ultimately, nothing went well.
0:13:08It's good when you finish an audit,
0:13:10and the guy's just like, all right, thanks.
0:13:11Thanks for your time.
0:13:12And off he goes.
0:13:13But overall, if you're confident in the choices
0:13:19making as you go.
0:13:20There's a lot less to worry about on the backend if you ever are audited.
0:13:23All right, so that's it for today's show.
0:13:26As always, if you have questions, comments, concerns, or complaints, I'm on Twitter @_DavidSmith,
0:13:29David@DevelopmentPerspective.com.
0:13:30Otherwise, if you have a great weekend, happy coding, and I will see you next week.