Posted By Jacob Jans, Editor

I got audited for mystery shopping! Here’s what happened…

Written by Kay Altland

Ever wondered how to document for your mystery shopping taxes?  Or maybe you wondered how to keep your biggest expense allowed on your taxes?  What would you do if you won the lottery, as in the IRS lottery, and was audited?  I am going to tell you my story on how this played out for me in 2015.

It was August 2015 and I went to the mail box as I got in from my main job.  I was looking at the mail and saw the dreaded IRS stamp on the envelop and I knew from previous experience that this would not be good news.  I opened the letter and started reading. They wanted proof of how I was able to claim so many miles as business deductions for the year. They were specifically interested in my mystery shopping miles.

Although I was nervous, I knew that there shouldn’t be too much of an issue with this audit.  Most of the mystery shopping platforms I worked for provide ample data for proof from their websites to show where I had been for the year.  I then contacted my tax preparer.

Unfornately, HR Block had put my tax preparer on mandatory leave during the month of August.  She was very nice and responded back immediately and told me when she would be back.  I looked back at the IRS letter and it said that I had to contact my IRS agent listed on the letter within two weeks, which was long before my tax preparer would be back.

Since I had worked for several companies that year, I went ahead and printed out the shop information that is provided on the platforms with the company’s website information at the top of each sheet. That year I had completed over 1200 shops for around 30 companies, so there was a lot of printing to complete.  After I printed my documentation and showed how I calculated my mileage and my beginning address I had to wait until the next day to call the IRS agent.

I called early in the morning and then again in the afternoon when I couldn’t get her.  When she answered she was very polite on the phone and I explained the letter that I had gotten.  I also explained that my tax preparer wouldn’t be available until after September to deal with this.  She asked who my tax preparer was and told me that she knew her and that this call would count as I contacted them.

She said she would document it and when my tax preparer was back, we could call and make an appointment.  She told that me she had some questions and wanted to look at her file for it first and put me on hold.  She picked back up and said she was more confused about what the business was and how I racked up so many miles for it.  I explained that I was a mystery shopper/auditor for a variety of companies and industries. I also explained that I began the shops at home, by accepting them on-line, and ended them at home, by filling out the reports.  I explained that I had to go to the physical locations of the businesses though in order to get the information for the reports.  She asked me what a mystery shopper does, and I explained the basics of what I do, and she said that she had always thought that was a scam.  She said the mileage made sense, but she would need to add it for herself after my tax preparer got back.  She then thanked me and told me that she would be talking to us again soon.

September came, and my tax preparer held a meeting with me determine what l I needed to bring.  I brought every address from each mystery shopping company’s location, including e-mails where some couldn’t be back tracked, and gave them to her.  She had me clarify what the purpose of the business was and how it operated.  She also asked me to write down how I calculated the mileage.  I explained to her what I explained to the IRS agent.  I only take the mileage that Google maps gives me after I put in the route from the mystery shopping platform.  This way there are no personal mileage in so included therefore it didn’t need to be accounted for.  I explained that at home is where I picked up the shops as well as entered the reports.  She organized all my documentation and set the meeting with the IRS agent.

The IRS agent had a few more questions which I answered through my preparer over the phone and then she said that she would add up the mileage for herself.  She did not want a printed copy of the excel file showing earnings, dates, mileage, etc., just the information from the companies.   It took her three weeks to go through it.  When the IRS agent completed the mileage, she called me and told me that was the most extensive documentation anyone had ever given her for mileage and if I kept records like that, I shouldn’t worry about being bothered with it again.  Two weeks later, I received a letter from the IRS stating that the deduction would be allowed.

All in all, it was a very time-consuming ordeal, but I wasn’t worried about it.  Most mystery shopping companies use a platform like Sassie or others, where I can log on and pull out specific dates and print the locations with the dates and earnings.  This is the best documentation to use, because each of the company’s websites is listed at the top of the printed sheets, so the IRS auditor can recheck and verify that the companies are legitimate if they want to.

I also wasn’t concerned because I never use personal mileage to calculate my mileage at the end of the year.  I always take the company’s website information, using my home address as a starting point, and entering the mileage from there for the trip using Google maps.  This gives the most accurate representation of where I went and doesn’t allow me to compute personal miles into the mileage.  They are automatically taken out.

I don’t take other business taxes like Home Office, supplies, or other items (over spending on shops when necessary), because in the end I do a lot of shops that benefit me and so the items I get are items I am going to personally use.  On the other hand, if I wasn’t doing the shop, I probably wouldn’t go to these places and and make a report, so that is why I take the mileage.

I hope this helps put someone else at ease and gives them ideas on what to use if they are stuck in a mystery shopping IRS audit or any other type of IRS audit.

Editor’s note: Don’t take any of this as professional tax advice!

Your Comments:

  1. Mike says:

    Nice article. I also was audited last year by the IRS for three years. I used the same example offer by this author to document my work for 40 companies and 8000 projects per year. The IRS WANTED $29,789 with additional interest and penalties. I provided over 14,000 pages of reports, google maps, receipts, oil changes, etc. after 13 months, the auditor settled for $163 in taxes and penalties. My assistance was through the tax team at TurboTax who did a splendid job of representing me to the IRS. I would recommend each person consider getting the tax Support from TurboTax When they prepare their taxes. My assessment is that the IRS has no idea about what secret shopping is and how it is done. You will need sufficient documentation to defend yourself in these cases. The IRS uses a particular spreadsheet to document my house for small businesses. You might wish to get them so you can prepare your taxes and defend yourself. Good luck!

  2. Bill says:

    Good info for what used to be. I believe all those depreciation and related business expenses went away in 2018. Thank you, Mr. Trump. May I have another.

  3. Huda says:

    Thanks for the good info. Thankfully I have never been audited but I also only record record mileage from map quest.

  4. Chester says:

    This article definitely documents that everything needs to be documented and be above reproach. I utilize Shop It for my shops where I can exactly tag time lines and include everything in 1 file.

  5. Marysol says:

    Thanks for sharing. This is interesting and relevant information for us.

  6. Rick Grossman says:

    Some advice:

    1) Never ever go to an audit without a tax professional.
    2) The agents understand people. Most of us will talk about ourselves out of nervousness and mention things that may seem trivial but will cause the auditor to dig deeper. If you are at an audit, pretend that you are a piece of furniture. Pass a note to your tax professional but don’t address the agent.]
    3) ONLY address the items listed on the audit. Do not discuss other deductions, income, etc.
    4) If the auditor asks for a report to understand something, and that report will not be enough, do not volunteer other information.]
    5) Auditors are a bit robotic. Your sense of humor or how nice you are is irrelevant.
    6) Don’t ask other questions.
    7) Keep a “contemporaneous” log for mileage. You are not allowed to deduct mileage between your home and first business stop. But as the author explained, her first business stop WAS at her home and the last stop was at home, so the miles in between may be counted. Be sure you can explain that you began and ended the day working at home. Auditors like to see handwritten logs, written in different pens, crossed out, etc. which tell them that you recorded your mileage as you drove them. They may ask for a few days of detail rather than everything. Anytime you provide them with a printed report, they will ask to see all the details.
    8) IF you claim expenses for a home office, it vastly increases your chance of an audit. A home office must be a separate space used for nothing else. They will ask for photos. A sofa or a TV will automatically mean it is rejected unless there is a clear business need for it.
    9) You can claim certain expenses such as office supplies. If you buy a phone or a printer or computer, it must be depreciated over several years.

    Most audits are random or are to identify why a particular expense is out of the average. The IRS has tables where they can predict the range of charitable donations, for example for different jobs and different income levels. Being aggressive in claiming expenses can trigger an audit.

    Be sure you have verified that you have listed EVERY 1099 and W2. They have a copy as well.

    If you have a business that loses money for several years, they may consider it a hobby.

    If you use something like Turbotax, it’s never a bad idea to show it to a tax professional before submitting it.

    File on time or file estimated taxes. Late filers get audited more and get automatic penalties.

    Since you do not have money withheld, you should make quarterly payments. (The IRS wants money up front.). You can slip by your first year, but if it’s August and you make over a certain amount, best to make at least one quarterly payment. You’ll find this information on their website.

    The IRS is incredibly understaffed. An audit takes a lot of work. Unless you’ve got some red flags (like mileage/charity/home office/other expenses high for your job/income level), your chances of an audit are low.

    (I am not an accountant or tax professional, nor do I play one on TV. I am not responsible for anything I’ve said since I was in first grade. Objects in mirror may be closer than they appear. This plastic bag is not a toy. Take at your own risk. My inner child can beat up your inner child.)

  7. Taimi Sepulveda says:

    The payments that are made to the IRS are not up front. It is a pay as you go system. When we do our returns for the year we are reconciling the payments to the taxes that occurred over the year. So if you have to pay with your return you are paying them for taxes you didn’t pay on a quarterly basis. On the other hand if you get a refund you gave to much.

  8. Crystal Martinez-Luevano says:

    I feel we will be just fine as long as we record everything we’re supposed to along the way. We must remember as long as we do our part the honest way we have nothing to worry about.