plumber audited for tax year 2006?

[tacks]

I spoke with a potential client who received an adjustment of approximately 4 thousand dollars from the IRS in 2006. It sounds as if the adjustment was based entirely on unreported 1099 self employment income with no account for the taxpayer's travel expense or any other possible expense.

I'm wondering how easy would it be for me to reopen that year, after the IRS made the adjustment. Is it practical to consider doing so? Is it possible to issue an amended 1040, or equivalent, accounting for legitimate schedule C expenses which could reduce the amount of tax, penalty and interest owed?

I understand that this adjustment came from a 'desk audit' and that no IRS agent visited him. I have not yet seen the 'adjustment' from the IRS. I would, of course, get a Power of Attorney if i were to attempt to open this.

I will be filing 2007 & 2008 1040s for this taxpayer. Taxpayer had only w2 income in 2007 & 2008.

thanks for reading

[geekgirldany]

Look at the notice/letter and see what information is on there. Ususally there is a place to check that the taxpayer disagrees with the amount of the proposed adjustment. Then explain why. You could then include the 1040x with a detailed explanation of what happened.

[Jiggers]

Unreported income

Why didn't the plumber report the income?

[OtisMozzetti]

what U.S. Tax Court keeps saying about business exps.

...unreported 1099 self employment income with no account for the taxpayer's travel expense or any other possible expense.

I'm wondering how easy would it be for me to reopen that year, after the IRS made the adjustment. Is it practical to consider doing so? Is it possible to issue an amended 1040, or equivalent, accounting for legitimate schedule C expenses which could reduce the amount of tax, penalty and interest owed?...

It is possible that the IRS might allow some of the expenses which the client tells you occurred in order to produce the unreported Schedule C income.

I have been reading virtually all of the U.S. Tax Court decisions which I see coming through, and I do with regret tell you that they are quite firm about the substantiation requirements for Schedule C and employee business expenses. For the "travel" (away from home overnight?) and meals & entertainment and listed property (including many vehicles) expenses, my reading of the steady stream of decisions is that the statutory strict substantiation requirements are enforced. Read that to say that if there are no complete and contemporaneous records, no deduction is allowed. I get the impression that this client didn't keep such records.

With regard to other deductions not covered by the statutory strict substantiation requirements, the Cohan rule applies, but even there the Tax Court generally mentions that they bear down against those whose own lack of records cause inexactitude. In other words, any estimated expenses have to be estimated on the low side according to the court decisions that I've been reading.

Good Luck, and here's hoping we all have a good bedside manner in convincing our clients that it is in their best interest to keep through records of their business expenses.

[tacks]

Look at the notice/letter and see what information is on there. Ususally there is a place to check that the taxpayer disagrees with the amount of the proposed adjustment. Then explain why. You could then include the 1040x with a detailed explanation of what happened.

Thanks, GGD,

I believe that the Taxpayer already agreed because he indicated that was paying the amounts (or at least beginning to pay).

So IF the taxpayer already agreed (which i strongly expect to be the case, and i'll soon find out for certain) is it possible to go back and reopen the case.

[tacks]

Why didn't the plumber report the income?

This guy is a young, blue collar guy from a low income area. And it's my guess that he was simply being irresponsible. He probably thought that he would get away with it.

It seems as though he's since learned his lesson. He's reached out to me. He got a city Business Priviledge license, an EIN and formed an LLC with the state.

[tacks]

Otis,
Thanks very much! That's perhaps even a little bit more in depth and technical than i was initially looking for -- but a very well thought out an informed response, none the less!

(sometimes i feel as though i owe a consulting fee to folks on this board ).

I'll look at it more in depth, later. Thanks again!!!

[ChEAr$]

one added thought

Be careful here. Plumber may not have reported all his income, BUT did he not
report all of his expenses already?
Need to check this very carefully.

[tacks]

Be careful here. Plumber may not have reported all his income, BUT did he not
report all of his expenses already?
Need to check this very carefully.

thanks for posting, ChEAr$

Having spoken with this gentleman I would be highly surprised if he had reported any expenses. I don't believe that he knew anyone with such tax 'know how' back then.

[tacks]

Update

UPDATE

Yesterday i went to this guy's house. I confirmed our appointment via cell phone on the way over. He was not home. I then waited outside his house. I called his cell and he didn't pick up. After 40 minutes i gave up on him and left.

frustrating

So this now is a dead issue. As i'll certainly NOT seek to obtain this guy's business.

(again, thanks all who offered advice)

[MLINDER42]

plumber

I always have people with tax problems meet me at a public place close to my home for first session than if they don't show up I did not waste much time or gas.If they are recommended by a client they I have them come to my home office. If they live near my regular office I have them come there when it is open.I only open it 4 hours a week in off season.

[tacks]

I always have people with tax problems meet me at a public place close to my home for first session than if they don't show up I did not waste much time or gas.If they are recommended by a client they I have them come to my home office. If they live near my regular office I have them come there when it is open.I only open it 4 hours a week in off season.

Prudent advice. Thank you.