The CPA fees for a 14000 dollar Schedule C audit ran higher than the tax bill

The IRS closed 505514 audits in fiscal year 2024 and recommended over 29 billion dollars in additional tax across all of them. About 78% were handled by mail. The rest were field audits, and even though they made up roughly a fifth of the total volume, they accounted for 23 billion of that 29 billion. The agency assessed 84.1 billion dollars in civil penalties that year across all return types. I keep those numbers around because they’re useful context when a small business owner calls me panicking about a letter they got, wanting to know how bad it can get. It can get bad. But most of the time, for the Schedule C filers pulling in under 100k who make up the bulk of my reporting, it gets expensive in ways they weren’t expecting, and the expense isn’t the tax.

A woman who runs a three person cleaning company in Raleigh went through a correspondence audit earlier this year on about 14000 dollars in business deductions. Her CPA spent the first few weeks trying to reassemble a paper trail from bank withdrawals and credit card records. She’d paid cash for a lot of her cleaning supplies and never asked for receipts at the register. Her CPA told her that’s extremely common with cleaning and janitorial businesses because the purchases are small and frequent, and nobody thinks to save a five dollar receipt from Dollar Tree. A few receipts she had saved were on thermal paper, and the ink had faded completely. Her CPA managed to get duplicate invoices from her main supply vendor, and that covered maybe 4000 dollars of the total. The bank records helped with another chunk. But there was a gap of maybe 3000 to 4000 dollars in expenses she could not document at all, even with reconstructed records. Her CPA cited the Cohan rule, which goes back to a 1930 Tax Court case involving a Broadway entertainer named George M. Cohan who kept no records and paid for everything in cash. The court told the IRS it had to accept reasonable estimates when a taxpayer could show the spending actually happened. Her attorney, who came in about three months into the process when things started getting adversarial, told me the IRS allowed some of the estimates but discounted them heavily. They disallowed roughly 3100 of the 14000. She owed additional tax plus interest going back to the original filing date. Her combined professional fees were about 2800 dollars. The tax she owed came in lower than what she paid to fight it.

A tax attorney in Baltimore who works mostly on audit defense told me the Cohan rule helps, but people overestimate what it does. “You might save 60 or 70 percent of a deduction,” she said. “But the IRS pushes hard on round numbers and vague estimates. And it doesn’t apply to travel or entertainment at all.” IRC Section 274(d) requires strict documentation for those categories. She said the real damage in most small business audits isn’t the additional tax, it’s the professional time. Her clients are paying 150 to 250 dollars an hour for somebody to go through two years of bank statements line by line and cross reference them with calendar entries and vendor records. When I asked her about the biggest mistakes she sees, she said it’s usually people who let the first response deadline go by because they didn’t have the records and didn’t know how to answer. Once that deadline passes, the IRS proposes adjustments on its own terms, and the whole dynamic changes.

The interest alone surprises people. It accrues from the due date of the original return, not from whenever the IRS decides to send the bill. A correspondence audit can stretch six months or longer, and by then, you’re looking at a couple of years of accumulated interest on tax you didn’t know about. The accuracy related penalty is 20% of the underpayment when the IRS finds a substantial understatement. The failure to respond penalty is 5% per month up to 25%. A landscaping company owner in suburban Atlanta went through a similar process on about 9000 dollars in equipment deductions. His CPA contacted Home Depot and two local hardware stores for duplicate records and got cooperation on roughly half the requests. Cash purchases were mostly unrecoverable because the stores didn’t keep records that far back for customers without loyalty accounts. The IRS allowed around 6200 of the original 9000. He owed about 800 in additional tax, and his CPA bill was close to 1500. He told me he didn’t fight the disallowed portion because his CPA said the cost of pushing back further would probably exceed whatever he’d recover. A documentation specialist at myreceiptmaker.com told me that every small business calling during an active audit is basically doing the same forensic reconstruction work, paying an accountant by the hour to verify expenses that took place months or years ago, and the total professional cost usually runs somewhere between 1500 and 5000 dollars depending on how much documentation is missing and how long the back and forth with the IRS takes.

The IRS can generally go back three years from the filing date to open an audit, or six years when income is significantly understated. There’s no limit to fraud. The SB/SE division, which covers most small business examinations, added about 8400 employees in 2024 but then lost more than 35% of its workforce to federal reduction in force actions in early 2025, and nobody has said publicly what that’s going to mean for audit volume or case processing times over the next couple of years.