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For seven years, Carlotta Thompson sat on the other side of the table from business owners during IRS audits. In that time, she reviewed thousands of returns, and says the thing that surprised her most wasn’t how often people claimed something they shouldn’t have. It was how often they claimed something they were legitimately entitled to, and lost it anyway, simply because they couldn’t prove it.
That distinction, Thompson says, sounds small. It isn’t. It’s the difference between a tax strategy that holds up and one that collapses the moment someone asks a follow-up question.
“An audit isn’t usually about what you did. It’s about what you can prove.”
Most people assume an audit is a search for wrongdoing. In Thompson’s experience, it’s closer to a search for paperwork. A business owner who used their vehicle for legitimate work travel but never kept a mileage log will lose that deduction, not because the travel wasn’t real, but because there’s no record establishing that it was. A business owner who genuinely paid their teenager to help with social media and marketing, but never set up formal payroll or documented the work performed, will have that deduction disallowed for the same reason: the underlying activity may have been completely legitimate, but there’s nothing on paper to support it if it’s questioned.
Thompson says she saw this pattern often enough that it became the foundation for how she now approaches tax planning on the other side of the profession. In her view, the strategy itself is rarely the vulnerable part of a return. The documentation is.
Why documentation, not strategy, is often the deciding factor
According to Thompson, a lot of the public conversation around tax planning focuses almost entirely on finding a deduction or credit, and comparatively little on building the record that allows it to survive scrutiny. Those are two different skills, she argues, and most tax preparers are only trained and staffed to handle the first one, particularly during the compressed weeks before a filing deadline, when there is limited time to assemble a documentation file for every strategy on a return.
Thompson is careful to frame this as a structural issue rather than a criticism of individual accountants. A preparer who handles many client returns in March explains that it’s usually not possible to work with an engineering company that has real estate experience to conduct a formal cost segregation study, which is typically done by an outside expert.They also can’t create a family employment agreement or gather comparable rental rate information for a home rental at that time.In her opinion, this kind of work needs to be done earlier in the year, preferably at the beginning of the tax year, not towards the end.
Practical documentation habits Thompson recommends
Thompson says the underlying lesson applies to any business owner, regardless of who they work with. For a home office deduction, she recommends keeping a floor plan and a clear record showing the space is used exclusively for business. For vehicle expenses, she advises a contemporaneous mileage log, kept in real time, not reconstructed after the fact—both of which must also be included in an accountable plan document, typically a mandated amendment to the operating agreement, where the expenses are agreed upon to be reimbursed For family employment arrangements, she says the relationship should be treated like any other: an executed employer/employee contract, actual payroll, documented job duties, and records of hours worked or output produced.
None of this, she notes, is complicated. It is, in her assessment, simply non-negotiable if the goal is a deduction that holds up under examination rather than one that only looks solid on paper.
The premise behind her firm
Thompson has said she left the IRS specifically to help business owners get ahead of this problem, rather than clean it up after an audit had already occurred. That premise underlies Tax Strategists of America, the firm she founded, which is built around proactive planning and documentation completed at the start of a tax year rather than reconstructed under pressure months later.
But Carlotta Thompson emphasizes that the broader principle doesn’t require working with any particular firm to apply. In tax planning, she says, the strategy tends to get the attention, but the documentation does the actual work. In her assessment, business owners who understand that distinction tend to keep more of what they’ve legitimately earned than those who treat documentation as an afterthought.
