A merchant who buys and sells wines through an LLC that shows up as a Schedule C business on his personal tax return was recently audited.

The IRS claimed he overstated expenses by almost half a million dollars, which yielded a tax and penalty adjustment of just over $200,000.

The auditor was particularly concerned about my client’s cost-of-goods-sold and gross receipts. His accountant had not been able to explain their computation to the auditor’s satisfaction.

That’s when they brought me on board to help them with their tax audit.

I studied the 15,000-line general ledger, isolating a few dozen random but representative transactions. I walked through these transactions with the auditor until she understood both how COGs and gross receipts had been computed, and also could replicate the formula on other transactions. This gave her confidence in the validity of accounting processes and calculations.

October 16, 2020