I have a similar story from 1987, but mine involves the auditor’s car getting broken into (after I told her where to park, so it would be safe), stretching the audit out to two days by continually finding more receipts and ending with the IRS owing me $7.You don't even need to do that to make the process more arduous for the IRS. In 1985 I received a notice from the IRS that I was going to be audited for my 1983 taxes. 1983 was the first year that i had earned almost all of my income as a freelancer, filing a pile of 1099's.
The auditor was a petite woman with the soul of Vlad the Impaler. A couple of weeks later I received a notice from the IRS that I owed back taxes and penalties totaling about $12,000, which was almost all of my savings at that time.
Sometimes the Universe intervenes in curious ways. One of my friends back then, an architectural photographer, offered to cheer me up by taking me out for dinner and beers at Gorky's, a restaurant popular with artists for its cheap and filling food and microbrewery in the Arts District in downtown LA.
Seating at Gorky's consisted of long communal tables. As I was working through my first pirogi and maybe my third beer, two young women approached us and asked if they could join us. I wasn't feeling exactly sociable, but decided to welcome them anyway. They settled at the table and introductions were made.
The conversation eventually turned to occupations and when I asked them theirs they said I wouldn't be interested as what they did was pretty arcane. I persisted and they said that they were both auditors for the IRS and were at Gorky's because they loved the atmosphere and they loved artists.
I'd had all I could take of auditors so my response was to tell them that I had just been audited and then to form a cross with my left and right index fingers. That caused them to break out into merry peals of laughter, which didn't exactly brighten my sour mood, but before I could say something rude they started asking me to tell them about the audit.
Turned out they had issues with the IRS and with auditors they felt broke the rules to bring in money and make themselves look good to their supervisors.
As I went through the audit and they asked more questions, my responses brought forth more laughter from them and I was ready to get up and walk. But before I could, one of them waved me to sit down and they proceeded to tell me that the audit was in violation of a number of rules, that my auditor was dirty, and that they would give me a roadmap on how to overturn the audit while inflicting maximum professional damage on the auditor. They explained that if I didn't fight this I stood a good chance of getting audited repeatedly, but if I put up a fight the IRS would back off.
Over the next 20 minutes they told me which IRS booklets to pick up, recommended a book on tax law for artists, and explained the process by which I would make Mrs Vlad's life hell.
Turns out Mrs Vlad had lied like hell to me.
I did the research, made a list of all of the rules and sections of the tax code that Mrs Vlad had misled me about and started the process.
Rather than submit all of the objections in a single document I listed only one, which would necessitate Mrs Vlad having to rewrite the audit report. When that report arrived, I would respond with one more objection, which would result in Mrs Vlad having to rewrite the audit again. I repeated this over the next eight months, forcing Mrs Vlad to clock countless hours on a continually diminishing result.
After 8 months I had the audit down from a $12,000 penalty to $30, which would cancel any further action on the part of the IRS, and if it hadn't I had more objections that would have taken the total into negative territory.
Seems I didn't take all the deductions I was entitled to.
Having hit the magic $30 I drove over to the IRS office in Van Nuys, went up to the receptionist with the pile of copies of the audit results that I had collected over the prior 8 months and asked to see Mrs Vlad's supervisor.
I handed over the stack of audit reports to the supervisor, asked him to review the case and wished him a good day. Two weeks later I received a letter from the IRS vacating the taxes and penalties and stating that I had passed my audit.
Mrs Vlad was transferred to a one person office in Death Valley.
The IRS did get its own back the following year when they sent me a letter stating that I owed them 27¢, which I paid by check.
I keep scrupulous records in case this ever happens again.
Like you, I keep good records and don’t hide income. I can’t, really, since all my clients are major institutions and issue 1099’s.