The Baby-Sitters Club Gets Audited
Kristy was more nervous that she'd ever been in her entire life. Eight-grade chemistry was hard? Ha! That was nothing compared to getting a scary letter from the IRS, telling her she was under audit! Sure, the auditor SEEMED like a nice person, but you could never be sure.
The auditor smiled at Kristy. "Before we begin, do you know why you're here?"
"No," Kristy said. "I don't understand why you called me here. You guys do taxes, right? I'm just a thirteen-year-old. I'm a kid! I don't pay taxes! Clearly, you must have made some kind of mistake."
"That's a common misconception," the auditor said. "It doesn't matter if you're under eighteen. If you earned income over the year, you have to pay taxes on that income."
"Well, I don't HAVE any income!" Kristy says. "I don't have a job, and I won't get a job until I'm sixteen. So, like I said, you must have made some kind of mistake. If you would just let me go now-"
"There's no need to be so nervous, Kristy," the auditor said. "Just calm down and relax. Now, think. Did you earn any money last year?"
"Well...I did baby-sitting, but that's not a job."
"Baby-sitting counts as self-employment income," the auditor said. "How much money did you earn from baby-sitting?"
"I, uh, I don't remember," Kristy said. "If you want, I can look in the club notebook or ask Stacey to do the math. But I don't know off the top of my head! That's ridiculous! Why would you expect me to know that?"
"Did you read the letter that the IRS sent you?" The auditor asked.
"No," Kristy admitted. "I just saw it, and I got scared. I asked my mom to read it for me."
The auditor nodded. This happened sometimes; not all taxpayers read what the IRS sent them. "Well, if you had read the letter in full, you would have seen that it told you to bring all of your necessary documentation to this meeting," he said.
"I'm sorry! Please don't punish me! I'll go home right now and get it!" Kristy said.
"That's okay, though. We'll try to do as much as we can right now, and if I need more information, you can send me it later," the auditor said. "Now, did you make over $400 in baby-sitting this past year?"
"Why do you ask?" Kristy asked.
"If you earned over $400 in self-employment, it means you met the minimum filing requirements," the auditor said.
"You mean, I don't pay taxes if I earned less than four hundred bucks?" Kristy asked.
"Yes," the auditor said.
Kristy let out a huge sigh of relief. "In that case, I only earned $399 from baby-sitting," she said. "So you don't need to audit me after all! Sorry you wasted your time. Can I go now?"
The auditor sighed. He never liked dealing with taxpayers who were clearly lying, especially since he was legally prevented from directly calling her out on her lie. Instead, he pulled out a document. "Have you seen this before?" He asked.
"No," Kristy said automatically.
"Try looking at it first, before you answer," he said. "This is a 1099-MISC. Do you recognize the names on it?"
"No, I don't-wait. That's my name, and that's Mrs. Newton. I baby-sit for her sometimes. So?"
"According to this, Mrs. Newton paid you over $400 in baby-sitting money last year," the auditor said. "Is this true?"
"Maybe? I mean, probably, yes," Kristy said. "We sit for the Newtons a lot."
"So you DID make over $400 last year," the auditor said.
"...Yes," Kristy mumbled.
"Which means you were required to file taxes for last year," the auditor said. "But like you said earlier, you didn't file because you thought you were too young. Don't worry. That's an understandable mistake. I'm going to work with you, and together, we'll fill out a tax form for you. Okay?"
"Okay..."
"Since your baby-sitting counts as self-employment income, you'll probably be required to file a Schedule C and a Schedule SE," the auditor said.
"I have no idea what those are," Kristy said.
"I can pull those forms up for you, so you can see them," the auditor said. "Now, did you baby-sit for anybody else besides the Newtons, or were they the only people you baby-sat for?"
"I baby-sat for a lot of families last year," Kristy said. "But none of them sent me a Form 1990-whatever!"
"Form 1099-MISC," the auditor said. "And it doesn't matter if they sent you a form or not. The money you made baby-sitting for them still counts as income for tax purposes. Now, you said you don't have all your baby-sitting paperwork with you at the moment, but we can still make an educated guess as to how much money you made. Do yo know how many families you baby-sat for?"
"Um...thirty?"
"Thirty? You must have been very busy."
"I baby-sit at least three times a week," Kristy said proudly. "I'm a professional."
"Your parents must be very proud," the auditor said. "Did you baby-sit each family around the same number of times, or are there some families you baby-sat more than others?"
"Well, some clients I sit for regularly," Kristy said. "Other clients, we only baby-sit them for one book, and then they never appear in the series again."
The auditor looked confused, at that comment. "Let me make sure I understand you," he said. "You're saying some people you baby-sit a lot, and some people you only baby-sit once or twice. Is that right?"
"That's right," Kristy said.
"Let's use the Newtons as a basis, since we have their information," the auditor said. "How many times did you baby-sit for them?"
"Why does that matter?" Kristy said.
"We know exactly how much they paid you, thanks to the form that Mrs. Newton filed with us. If we divide that by the number of times you baby-sat for them, we'll have a general idea of how much you get paid per baby-sitting job," the auditor said. "Emphasis on general. It's obviously not going to be exact. Right now, we're just estimating."
"But that doesn't work!" Kristy said. "I mean, when I sit at the Newton's, I'm just watching Jamie, and sometimes baby Lucy. That's totally different from the Pikes, who have eight kids! The Pikes pay a lot more for baby-sitters."
"That's fine. We can do the math that way, too," the auditor said. "We can figure out how much you get paid per child, then figure out the average number of children per family. That's another way of figuring out how much money you usually make while baby-sitting."
"Oh! You want to know how much we charge per child?" Kristy said. "That's easy! We charge five dollars per child, per hour."
"That's...wonderful," the auditor said, smiling to disguise his frustration at Kristy forcing him to determine her income in such a time-consuming, roundabout way. Why hadn't she bothered to read her letter and bring her records, as requested of her? "If we know your hourly wage, that can also be used to help determine your income last year. But before we finish with that, you brought up a secondary issue that I'd like to address."
"I did?" Kristy asked.
"You did. You said WE charge five dollars per child, per house," the auditor said. "Who is we? What are you referring to?"
"The Baby-Sitters Club, of course!" Kristy said.
"And what is the Baby-Sitters Club?" The auditor asked.
Kristy NEVER turned down an opportunity to talk about the Baby-Sitters Club. "It's a club of baby-sitters! It was all my idea. I came home from school one day, and Mom was having a hard time finding a sitter for David Michael. That's my brother. She called about five people, and then, I had my great idea! I have a lot of great ideas. The idea was, wouldn't it be easier if she didn't have to call five separate people? It'd be easier if she only had to call ONE person. And that's how I got the idea of the Baby-Sitters Club! People call us, and they get in contact with seven reliable baby-sitters! It's so convenient! Much better than calling seven baby-sitters all in a row! Just call during a club meeting, and one of us will baby-sit for you! But of course, we can't be a disorganized group. We have officers and a club notebook and everything. Let me explain to you how that works."
The rambling taxpayer, the auditor thought to himself.
"That is not necessary," the auditor said. "Let me see if I understand you correctly. The Baby-Sitters Club is a baby-sitting business that you're a part of."
"It's not a business. It's a club," Kristy said, sounding offended.
"It might still be a business, even if it's not called a business," the auditor said. "So you're saying people use the club to hire baby-sitters. Correct?"
"Exactly! You call the club, and you tell us the date and time you need a baby-sitter. We go through the schedule and see who's available. Then we assign one of the baby-sitters to the job!"
"It sounds to me like the Baby-Sitters Club is a business," the auditor said. "Think of it as something similar to a maid service, if that helps."
"But it's NOT a business! It's a club!" Kristy said. "The Baby-Sitters Club doesn't make any money! Well, except for the club dues that we pay every week, so we can get things for our kid kits and club parties and stuff like that. Let me tell you all about kid kits! It's a brilliant idea-one of mine-"
"I'd love to hear about the kid kits some other time, but we need to focus on the issue at hand," the auditor said politely. "Now. You just told me that you have to pay money every week, to be part of the Baby-Sitters Club."
"I never thought of it THAT way," Kristy said. "But I guess that's true."
"Okay, then. The Baby-Sitters Club is a business."
"It's a club!"
"Either way, it sounds like you work for the Baby-Sitters Club. Did they give you any documents or forms to help you file your taxes this year? A W-2 perhaps? Or a 1099-MISC like you got from Mrs. Newton?"
"Why would we do that?" Kristy asked. "I wouldn't give tax documents to my friends. Then they'd have to pay taxes! They'd hate me forever if I did that."
"You're in charge of the Baby-Sitters Club?"
"I'm the President!" Kristy said proudly.
"Would you say that you're the sole proprietor of the business?" The auditor asked.
"No, I never say things I don't understand," Kristy said.
"Let me rephrase the question. You and your friends run the Baby-Sitters Club together. I'm guessing you haven't filed out the paperwork to classify yourselves as a partnership or S corporation..."
"Wait! I just remembered," Kristy said. "There IS a thing that they send me every year."
"What?" The auditor asked.
Kristy dug into the pocket of her blue jeans and pulled out a scrunched up piece of paper. "I usually throw it out after my stepdad puts the money in my bank account. I had to dig through the trash can by my desk in order to find it. I hope it helps!"
The auditor took the paper from Kristy and read it. It appeared to be an income document. "Who...who is Scholastic Publishing? Why are they giving you royalties?"
"They write books about us," Kristy said. "We've sold over 100 million books, and the eBook reprints are doing better than they expected!"
"Hmmm..." the auditor said. Scholastic had helpfully included a total amount of money they had earned from the Baby-Sitters Club over the past few decades. The auditor's eyes nearly popped out of his skull. Over half a billion dollars, gross? For a thirteen-year-old girl?
"This is out of scope for me," the auditor said. "I only handle small-income individual tax returns. I'm going to have to write up a referral on this."
"What does that mean?" Kristy asked.
The auditor smiled at her. "That means you get to go home early! Thank you for giving me this document. I'm going to make a copy of it, okay? And I'll give it to someone else, so they can work on this case."
"Sure!" Kristy said. "Oh, wow! Ha ha! That's it? I was scared you were going to take all my money or something! I guess the IRS isn't bad, after all!"
The auditor smiled. "We're just trying to make sure that everyone fulfills their tax obligation," he said. "Now, don't be surprised if my co-worker calls you, to ask for more information about the Baby-Sitters Club."
"I love talking about the Baby-Sitters Club!" Kristy said.
"That's the spirit!" The auditor said. "Any chance you could give me a list of all its members?"
"Sure! There's Claudia and Stacey and Mary Anne, and..."
In the weeks to come, Kristy received a phone call from some friendly people who worked for Criminal Investigation, asking about unfiled tax returns. It was eventually determined that Kristy's millionaire stepfather, Watson Brewer, had made his fortune by stealing the profits from the Baby-Sitters Club books and not reporting the income to anyone.
Needless to say, every tax return he had filed since 1986 had been fraudulent.
And there is no statute of limitations on tax fraud.
Watson was going to jail for a long, long time.
THE END