Do You Need a Bigger Boat? An IRS Audit Story About Business and Personal Expenses

Summer is finally here.

Kids are out of school. Pools are open. Barbeques are smoking. Vacation plans are filling the calendar.

One of my favorite summer traditions is watching Jaws. Released in 1975, it's widely considered the original summer blockbuster and remains my favorite movie of all time.

The film follows a small New England beach town terrorized by a great white shark. The movie's most famous line comes when Chief Brody gets his first real look at the shark and realizes the problem is much bigger than anyone expected:

"You’re gonna need a bigger boat."

That line always takes me back to an audit I worked on one summer at the IRS.

The taxpayer owned a successful digital marketing company that generated well into six figures. He created online advertisements for various businesses and was paid based on the performance of those ads.

His accountant was a nice guy, and throughout the audit we developed a good rapport.

One day, while reviewing the general ledger, I noticed a $40,000 transaction coded to the travel account from a vendor I didn't recognize.

A quick Google search revealed it was a boat dealership.

I walked into the accountant's office and asked, "Did you know he bought a boat?"

Without missing a beat, he looked at me and replied:

"He bought a boat?!?"

After a brief pause, he laughed and shouted:

"Adjustment!"

As it turned out, the boat wasn't the only personal expense that had found its way into the company's books. Because the taxpayer operated through a C Corporation, those expenses couldn't simply remain as business deductions. They were ultimately treated as personal benefits received from the corporation, eliminating the deductions and creating additional tax, penalties, and interest.

There was never any indication of fraud or intentional wrongdoing. The taxpayer simply made good money, bought a boat and other personal items, then paid for them from the business account. The accountant missed it, and by the time the audit rolled around, the correction became unavoidable.

The audit ultimately ended with an agreed Revenue Agent Report and additional tax, penalties, and interest due. In fact, the total amount owed exceeded the cost of the boat itself.

With summer here and so many things competing for our attention, it's easy for bookkeeping to become an afterthought. Personal and business expenses start blending together, transactions aren't reviewed as closely, and small issues quietly grow into larger ones.

Most of the time, these situations aren't caused by bad intentions. They're caused by a lack of organization and oversight.

A little attention throughout the year can prevent a lot of headaches later.

So, as you enjoy the summer months, remember to keep your business and personal finances separate... even if you need a bigger boat.