Spreadsheet Accounting and Going Through Audits?

Tax, SDIRAs & Cost Segregation
5yFollow

Spreadsheet Accounting and Going Through Audits?

Nicholas Anderson
Tampa, FL · Member since 2019 · 6 posts · 3 votes
Hello BP,

So I'm a few flips into a business endeavor here and have come to the point where it is really time to get organized.  One of the issues I'm having trouble with is the accounting aspect.  All of the accounting software seems like pretty serious overkill for a single-member LLC that flips houses and is taxed on a Schedule C form.  I was able to whip up a 6 tab spreadsheet (In addition to separate detailed job accounting spreadsheets for each property) that captures my cashflow nicely but obviously has no fancy account reconciliation or accrual-based accounting with Accounts Receivable or that sort of stuff.  Just the basics.  Income statement, expenses, transaction summaries(the flips), Other income, Owners Equity, and a Cash ledger.

Now, anyone with a business that is worth a lick is currently either shaking their heads or aghast reading this.  I get it.  Its not 'pro' but I don't really want to blow subscription fees or a big upfront cost for complex software that I then have to learn for maybe 5 flips a year.  Not unless I really have to anyways.

So, onto the question, has anyone ever been through an audit with this kind of haphazard spreadsheet accounting before?  If so, was it the absolute bane of your existence or did they just kinda shrug like it was par for the course with small businesses?  I have no problems actually running the LLC with this; its small, project based, and again only needs to use a Schedule C for taxes.  My fear is that when I get the distinction of living through my first IRS shakedown I'll be creating more problems for myself than I'm solving by keeping my accounting simple and minimal.  Any thoughts on the matter?
0Reply
33 views

Most Popular Reply

Greg O'BrienBusiness Member
Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
5y

@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!

2Reply
See this reply in the discussion

10 Replies

Jump to latestLatest
  • Christopher Smith
    Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
    5y

    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.

    2Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    5y

    @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. 

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    5y

    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. 

    1Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    5y

    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.

    1Reply
  • Christopher Smith
    Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
    5y
    Originally posted by @Pat L.:

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

    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.

    When you say large operating expenses were your properties all reporting large tax losses?

    0Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    5y

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

    0Reply
  • Greg O'BrienBusiness Member
    Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
    5y

    @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.

    0Reply
  • Nicholas Anderson
    OP
    Tampa, FL · Member since 2019 · 6 posts · 3 votes
    5y

    These are great insights, thank you all for your responses.  @Bill B. 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?

    0Reply
  • Greg O'BrienBusiness Member
    Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
    5y

    @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!

    2Reply
  • Nicholas Anderson
    OP
    Tampa, FL · Member since 2019 · 6 posts · 3 votes
    5y
    Originally posted by @Greg O'Brien:

    @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!

    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.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free