Upon Examination: How to correct charitable carryover

[OtisMozzetti]

Client regularly donates, please do believe it (well substantiated), about 52% of his AGI each year to IRS-approved "50%" charitable organizations. An additional $15,000 (roughly) was mistakenly claimed (I did not prepare the returns) in his 2007 return and on his 2008 return, and now the IRS examination has established that the $30,000 (approximate) was not OK.

By my way of correcting the returns, that means that the charitable deduction carryover coming out of those years was reduced. There should be no change in his tax liability after the correct deduction amount is used. He has never yet used the carryovers in question.

Along comes the IRS examiner. He or she just punches into some kind of software to add each of those carryovers into the taxpayer's taxable income for the single year 2008, and charges income tax, penalty and interest on the difference. My question is: how should the disallowance of a carryover that never reduced taxable income to begin with cause there to be additional tax, and penalty, and interest back to a specific time?

I will appreciate any ideas you may have. Do I need to pull up some code section numbers to cite? I know what clearly makes common sense to me, but I'd like to make certain they don't have something (obscure?) to throw at us.

[appelman]

Why not file 1040X's?

Why not file 1040X's, with revised Schedule A's attached, showing the correct contribution, along with carryover worksheets. If what you say is correct, there should be no change in tax liability.

[OtisMozzetti]

Why not file 1040X's?

Why not file 1040X's, with revised Schedule A's attached, showing the correct contribution, along with carryover worksheets. If what you say is correct, there should be no change in tax liability.

As my original posting said, I certainly appreciate any ideas you have to offer. I suppose that a 1040X, in this case the old before-change-after version, would be a helpful exhibit to explain what needs to be changed. It has been my understanding, though, that when an examination occurs, the examination itself, not an amended return, is considered the way to get the necessary changes implemented???

[OtisMozzetti]

change resulting from an examination?

...
If what you say is correct, there should be no change in tax liability.
...

It seems to me that the change resulting from an examination consists of

the tax liability refigured with any erroneous items replaced by corrected (including possibly zero) figures
---minus---
the tax liability as previously filed.

Yet, he or she is sending out papers that say add back on charitable contributions which never actually have affected the taxable income or tax liability because those charitable contributions were over the 50% limit and only gave rise to carryovers that have never even yet been utilized.

[Kram BergGold]

1040X is a no no

You are not allowed to file a 1040X for a return that is in examinations. You need to work with the examiner or the supervisor to get the audit concluded correctly with no change and reduced carryovers.

[appelman]

Well, I would think you should at least have in hand...

Well, I would think you should at least have in hand corrected Schedule A's and carryover worksheets that show no change in the actual deduction taken in each of the years.

[JohnH]

I was working a Corp audit last year and was trying to figure out the best way to illustrate the effect of several interrelated adjustment (cogs, s/h loan interest, and a dpad deduction). After wrestling with it for a couple of hours, I simply prepared a new 1120, color highlighted the affected lines, wrote "for discussion purposes only" all over it, and attached it to the 4564 with a notation that the attached return has not been filed, but is provided as a worksheet only. The auditor thanked me for the info, somehow put it into her worksheets, and came up within a couplle of hundred dollars of my figures. We were all very happy with the outcome.

Maybe you could try a similar approach. After all, if your workup is correct, then somebody at some point will have to explain not only how they came up with their results, but why they think yours are wrong. And if you have to go over the auditor's head, their supervisor might just start with your workup, which would put them on the defensive right out of the gate.

[travis bickle]

Yes,

I was working a Corp audit last year and was trying to figure out the best way to illustrate the effect of several interrelated adjustment (cogs, s/h loan interest, and a dpad deduction). After wrestling with it for a couple of hours, I simply prepared a new 1120, color highlighted the affected lines, wrote "for discussion purposes only" all over it, and attached it to the 4564 with a notation that the attached return has not been filed, but is provided as a worksheet only. . . .
Maybe you could try a similar approach. After all, if your workup is correct, then somebody at some point will have to explain not only how they came up with their results, but why they think yours are wrong. And if you have to go over the auditor's head, their supervisor might just start with your workup, which would put them on the defensive right out of the gate.

this is the way to do it.

Prepare the appropriate 1040X per year, annotate each with "DO NOT FILE - WORKSHEET ONLY" in red across the top/down the side.

Attach a literal explanation. As everyone has said, the carryover has not been used, you will not have a tax liability, etc. And, if the auditor refuses to accept the 1040Xs, immediately request his/her supervisor as John H has said.

[OtisMozzetti]

I thank each of you, Appelman, John H, travis bickle, and Kram BergGold, for your helpful comments. I know just about what to have ready that can best illustrate my client's position about what needs to be done with the corrections that have been found.

[Burke]

By my way of correcting the returns, that means that the charitable deduction carryover coming out of those years was reduced. There should be no change in his tax liability after the correct deduction amount is used. He has never yet used the carryovers in question.Along comes the IRS examiner. He or she just punches into some kind of software to add each of those carryovers into the taxpayer's taxable income for the single year 2008, and charges income tax, penalty and interest on the difference.

I never heard of such a treatment and believe as you do, it is completely off-base and incorrect. I agree with the other posters as to how to resolve.

[joanmcq]

The examiner just punches the numbers into a program that adds the amount back to taxable income. He or she may not even know about the carryovers. Its up to you to make the examiner aware of the issue and represent your client. So write back or pick up the phone and send in the info detailing the issue.

[OtisMozzetti]

punching a number into a program that adds back to taxable income

The examiner just punches the numbers into a program that adds the amount back to taxable income. He or she may not even know about the carryovers. Its up to you to make the examiner aware of the issue and represent your client. So write back or pick up the phone and send in the info detailing the issue.

The examiner just punches the numbers into a program that adds the amount back to taxable income.

Apparently, the examiner just punched one number, the total of the adjustment in carryover from prior years plus the adjustment in current year contributions, into an audit report program that increases taxable income by that number.

I thank joanmcq for an exceptionally pertinent and well stated reply. I was already in touch with IRS in the manner that joanmcq well described.

It is something that probably is done by examiners on all sorts of issues including not only charitable deductions and/or carryovers, something that a lot of the participants in the TMI Message Board and even the IRS can benefit from keeping in mind.

[joanmcq]

I run into these kind of issues on SE tax all the time. Either after the adjustment, they still have a loss, so no SE, or on one recently, his wages put him way above the SE threshold, and all he owed was the Medicare portion. I always review the exam results carefully. Even had one where the tax was off because when they switched from itemized deductions to the standard, they forgot the new property tax allowance. They're generally easy fixes.

[OtisMozzetti]

thanks to joanmcq

I run into these kind of issues on SE tax all the time. Either after the adjustment, they still have a loss, so no SE, or on one recently, his wages put him way above the SE threshold, and all he owed was the Medicare portion. I always review the exam results carefully. Even had one where the tax was off because when they switched from itemized deductions to the standard, they forgot the new property tax allowance. They're generally easy fixes.

I say again thanks to joanmcq. You've identified some different sorts of issues, such as SE tax, where the adjustment entered into an exam results software might end up inadequately describing the situation.