Surviving a Tax Audit
Profit Center: Learn how one trainer handled it when—gulp!—the IRS came calling.
We work hard as personal trainers. Many of us invest a great deal of not only our time but also our hard-earned money in our chosen profession; expenses such as certifications, uniforms, CPR training, continuing education credits, business cards and fitness equipment really add up. The good news is that a significant portion of the costs of doing business can be itemized as deductions. The bad news is that, because personal training is still a young profession, the Internal Revenue Service (IRS) doesn’t always readily understand our deductions.
I learned this firsthand. On August 15, 2001, I received a letter containing the words that no American wants to read: “Internal Revenue Service—Department of the Treasury: We selected your 1999 federal income tax return for examination and have scheduled the following appointment for you.” The letter asked me to bring records supporting my employee business expenses.
The following account details my actual IRS audit experience. Although not an accountant, I believe my experience will shed light on mysteries about this complex process and help you save valuable time and money and potential aggravation if you are ever audited.
In 1999, I worked as a personal trainer and group fitness instructor at three different clubs in New York City. I also trained clients at a private training facility, paying the gym monthly rent and session fees and setting my own rates per session. That year was the last one for which I prepared my tax return myself, using the TurboTax software and filing my return electronically. I itemized my deductions, which were significant that tax year.
As always, I had kept meticulous records. At the end of every day, I emptied my wallet of all business-related receipts. On the back of each receipt, I wrote a note describing the expense. For example, if I needed to purchase black shorts for work at a specific gym, I wrote the name of the gym and “uniform” on the receipt. If I took a cab to a work-related event, such as a continuing education seminar, I wrote a short description of the event’s purpose on the back of the cab receipt. Every night, I also recorded the business of the day in a special book using two columns: one labeled “income” and another labeled “expenses.” I then recorded three essential pieces of data—the date, a short description of the expense and the amount—into the book. I stored all of my receipts in a manila envelope. This whole process took just a few minutes each night. It was simple and would both prove convenient during tax time and pay dividends in the long run.
When I received the audit notice, I immediately called my accountant to set up a meeting to discuss the matter. My main concern was whether I should attend the audit alone or have him represent me. We met, and I explained my situation in 1999 to him, showing him my receipts, credit card statements and detailed income/expense book. Although willing to represent me, he believed that, with my copious records and the relatively small amount of my return, I would do well by myself. (He did not foresee a lengthy audit and, if he did attend it with me, would obviously have to charge me.) He advised me to separate my receipts into categories, putting each category into an envelope with the specific type of expense and total amount of expenses for that category written on the front. He also told me to transfer all of my expense information into an expense journal utilizing the categories I had chosen. In addition, I recorded all of the information from my journal into a weekly tax expense record. (See “Documenting Expenses” below.) My accountant’s final instructions were to bring all receipts, credit card statements, cancelled checks and log books with me to the audit.
I went to the IRS offices in Midtown Manhattan and was not “in and out” that day, as my accountant had expected. I spent the first hour explaining to two IRS agents exactly what my business as a fitness professional entailed. The agents and I then spent that entire first day logging my receipts, including every expense: every cab ride, dumbbell purchase, certification test and more.
We were only about halfway through the receipts when they told me I had to return in several weeks to complete the process. In the interim, I needed from each of the three clubs where I worked a letter saying that I was not reimbursed for my expenses. The letter also had to state that these specific expenses that I had outlined were definitely necessary. (I was actually not required to get a letter from the private facility where I rented space; I merely reported the monies I made at this club as income and labeled the gym rent as an expense. The agent treated these items as just additional income and expenses.) I spent the next several weeks making numerous phone calls and running from club to club to obtain these letters. After considerable effort, I got all three. (I recommend that you draft such a letter and have your club’s management sign it for future protection. See “Sample Business Letter for the IRS” on page 23 for one of the actual letters I furnished to the IRS.)
Only one of the two agents from the first session was present for my second visit, and, as we sorted through my remaining receipts, she repeatedly asked me, “Was this expense required by your employer?” I believe this is one of the most pertinent pieces of information that you need to keep in mind as you itemize your deductions. The IRS says, “To be deductible, an expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. An expense does not have to be indispensable to be considered necessary.” (See “What Can I Deduct?” at www.irs.gov for more information.)
This question of whether or not expenses were “required” came up several times and especially with regard to continuing education expenses. (Many clubs, including the ones that employed me in 1999, required me to attend numerous fitness seminars at my own expense. In addition to my significant athletic achievements, obtaining those additional certifications and skills helped promote me to a higher pay scale.) The IRS states, “You may be able to deduct work-related educational expenses paid during the year as an itemized deduction on Schedule A of Form 1040. To be deductible, your expenses must be for education that:
- Maintains or improves skills required for your present job; or
- Serves a business purpose of your employer, or by law or regulation, to keep your present salary, status or job.”
Some CPAs think it’s preferable to deduct expenses on Schedule C because you do not have to exceed the threshold of 2 percent of adjusted gross income, as you do on Schedule A. Self-employed trainers can file a Schedule C.
We eventually finished logging all of my receipts, cancelled checks and credit card receipts. The logbook that I had kept so religiously was my saving grace. Whenever a question about the purpose of a receipt came up, I simply checked the date on it, looked it up and explained it to the agent.
What was the result of my audit? Several weeks later, I received a letter that stated, “We examined your tax return(s) for the above period(s) and made no changes to the tax you reported.” I had successfully defended my audit! The whole process taught me several important lessons.
Record All Expenses in a Formatted Logbook Right Away. Both my accountant and the IRS agents may have remarked at how thorough my recordkeeping was, but transferring all of my information into categories and weekly totals took quite a bit of time. Save yourself time later by categorizing your fitness expenses as you incur them and keeping weekly totals in an expense record journal. (Basic accounting software, such as QuickBooks, can make this process even easier and faster.)
Obtain Letters From Your Employers. Ask each of them now for that letter stating that the fitness expenses you incur are necessary to your job and not reimbursed. (See “Sample Business Letter for the IRS” above.) List your specific expenses.
Be Honest. As stressful as those weeks were (and, trust me, they were), knowing that I had nothing to hide was truly a great feeling. It is much easier to sit in front of IRS agents when you know that you are being truthful.
Know What You Can Deduct. Make sure you understand the types of deductions that the IRS allows. Many of the expenses we incur are directly related to improving the skills required for our jobs, and the vast majority of them are not reimbursed by our clubs. We can deduct these. Health insurance for the self-employed is another major allowable expense.
If you are a career-minded fitness professional and even if you plan to prepare your tax return yourself, I highly recommend investing in a consultation—or two—with an accountant. It can save you time and headache. A tax professional can provide answers regarding whether or not certain expenses fit the criteria of approved deductions, and you can deduct the consultation fee!
For the latest research, statistics, sample classes, and more, "Like" IDEA on Facebook here.
To help me prepare for my audit, my accountant advised me to separate my expenses into categories. These were the ones that I used:
Clothing/Uniforms. This included the costs of the exercise clothing that I wore while either training clients or teaching classes.
Continuing Education. This included the costs of certifications, continuing education courses, CPR training and texts purchased for home study.
Travel Away From Home. This included all of my out-of-state business-related expenses. In 1999, these costs included my travel to New Zealand and Germany to compete in Ironman Triathlons. (Incidentally, I specialize in training endurance athletes, and this travel and experience moved me to higher positions and pay scales in the facilities where I worked.)
Local Travel. This included the costs of travel within New York to fitness seminars, club meetings and so forth.
Fitness Equipment. This included the costs of CDs for cycling classes, microphones, weights and any other equipment that I used to conduct my fitness business.
Dues and Subscriptions. This included dues for NSCA, IDEA and other organizations to which I belong. It also included the costs of subscriptions to professional trade journals and publications such as Triathlete and Runner’s World.
Miscellaneous. This included the numerous expenses that I incurred but that didn’t fall into the other categories.
My accountant advised me to record my expenses in weekly tax records such as this:
If audited by the IRS, you may need from each of the businesses where you work(ed) a letter stating that the expenses that you claim were necessary and that it did not reimburse you for those expenses. Here is a sample letter I wrote:
To Whom It May Concern:
The purpose of this letter is to inform you that, as a personal trainer and group fitness instructor at [name of club], Thomas P. Holland was required to incur outside expenses to perform his duties and advance within our organization. We did not reimburse him for these expenses.
These expenses included but were not limited to workout clothing, music for group fitness classes, continuing fitness education (including CPR and fitness certifications), exercise equipment, travel to fitness seminars and specialty sporting events, and office supplies pertaining to his client and class recordkeeping. All of these expenses were integral to his job description and led directly to his advancement within our company.
[name of club]
[date of letter]
IDEA PERSONAL Trainer April 2003
© 2003 by IDEA Health & Fitness Inc. All rights reserved. Reproduction without permission is strictly prohibited.
IDEA Newsletter Sign-up
|Extreme Interval Training
In this course you'll learn goal-focused intervals and over 50 dynamic exercises and drills to create extensive and intensive training formats.
|Cut to the Core
This is a raw, unedited video filmed live at the 2009 IDEA World Fitness Convention™. Cut to the Core is packed full of core-focused exercises that aim to improve the way you look, feel and live.
|September 2011 IDEA Fitness Journal Quiz 4: Plyometric Training
This continuing education quiz is an in-depth look at plyometric training. Plyometric exercises—jumping, bounding, hopping, arm pushing, and catching and throwing weighted objects such as machine balls—are movements that involve rapid eccentric and concentric muscle actions.