Spreadsheet Accounting and Going Through Audits?

Question

Christopher Smith · Answer

I've used a simple one page spreadsheet for 20+ years for multiple rental properties in multiple states, and I'm not even the least little bit concerned by an audit. Now I've never been audited (whether you see that as good or bad), but to me I don't think that is really the point. As long as your business accounts are kept separate from your personal accounts, and the processes that you use to record your activity are clear and consistent, I see absolutely no need for an elaborate set of financial statements. In fact my spreadsheet is much more tailored to tax reporting than financial reporting so its much easier to work from for tax compliance purposes than it would be to work from a set of financials.

Just my opinion.

Greg O'Brien · Answer

@Nicholas Anderson in this case, the person came to me (wasnt my client prior) so had to work with what he did and did not have records wise. The auditor was very in the weeds on two expense line items, but more about the jusitification vs tieing out. For example, she was questioning thevdeductibility of his travel vs the actual amounts. Second, we prepared a summary showing “total per line X vs total per bank statement”. They accepted this. We printed out hundreds of bank statements but they didnt even look. It turned into a negotiation as the client owed $50k plus and we probably settled under $20k.

IRS audits are highly individualized. We always suggest approaching him/her with grace, be open about any mistakes and it will go fine!

Pat L. · Answer

I lived through two audits both triggered by large but valid operating expenses.

The auditor was more interested in my bank ledgers, especially cancelled checks &/or CC accounting for specific expenses including the corresponding receipts, per expense per property.

My wife has always maintained separate bank accounts for each property so that was easy. She also maintains Sched E type spreadsheets for each property detailing all expenses, capital improvements & especially mileage by property, & the auditor liked that.

I came in with copies of everything & she went through them in detail. The audit was two 1/2 days a week for 3 weeks (at the time my tax returns were 200+ pages). Then they decided to audit yet another year.

I was finally assessed $9k+ in taxes plus penalties for some obscure SE income so I wrote a check.

2 years later they reversed that decision & paid back my $9k+ with interest. Have not changed my accounting since then.

Bill B. · Answer

You really can’t spend $50 for quicken? I use it for more than a dozen properties and it’s still overkill. But it’s $50 friggin dollars. And it auto inputs all your checks and credit card charges. In 10 seconds I can pull up income and expenses per property or over all the properties by type. It will save you hours and hours per year.

Don’t do it because your afraid of an audit. Do it because it’s a smart use of your time and $1 per week.

Nicholas Anderson · Answer

Thank you very much for the information.  An audit is one of my biggest fears in this venture, so this helps put my mind at ease a bit.

Nicholas Anderson · Answer

These are great insights, thank you all for your responses.  @Bill Brandt its moreso the time and commitment of learning the platform than the cost, although I hadn't even considered Quicken.  Cost is a factor too, though.  I was thinking Quickbooks which is $30/month for the features I need.

@Greg O'Brien, the co-mingled accounts is something I got away from as quickly as possible.  Not soon enough unfortunately - trying to tie bank statements to excel spreadsheets for one flip will be an absolute nightmare.  The case for not co-mingling really makes itself as soon as you try to put anything on books.  Thats the kind of things I'm very concerned about, though.  The IRS was actually going line by line in bank statements and attempting to match it to specific entries in his spreadsheet, like $307.50 at Lowes on the credit card matched to the line in Spreadsheet for $307.50 for a new stove on Project ABC?  Mind if I ask anything about details, how lenient they were, what their demands for evidence were, etc?

Greg O'Brien · Answer

@Christopher Smith I defended someone in 2019 who had spreadsheet accounting. That was fine but they had a comingled bank account which was not. The auditor tried to tie out the bank stmts to the Excel sheets though and we had to produce all the backup.

Pat L. · Answer

@Christopher Smith yes major rehab for code compliance & a lot of mileage.

Dan Schwartz · Answer

@Nicholas Anderson the quality of your records count more than the format.  If you want an easy way to step up your thoroughness, save the spreadsheet in either a) a cloud service that offers unlimited versioning, or b) save a locked version of the spreadsheet at the end of every month to “version it yourself.”   Just an idea to show any potential auditor that you haven’t gone back and changed all of the records - and if you did you can explain when and why.  Hope you never need to go through an audit, but this came to mind.

Spreadsheet Accounting and Going Through Audits?

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