2013 audit

[JenMO]

New Client brings return prepared by another tax preparer. Audit is disallowing many deductions. These deductions were taken on Sch C, and the income and deductions should have been on the Sch A form 2106. Taxpayer(employee) was reimbursed for mileage and then issued a 1099 for this amount. I would like to amend the tax to get the tax liability down(from what IRS is proposing), using some of the deductions that were disallowed. We have lots of documentation on mileage, destinations, tools, etc. Is this how I respond with an amended, documentation, and the IRS letters?

[JenMO]

this return was not prepared correctly. How should that be presented?

[taxea]

Yes, prepare a 1040X with the corrections and include both a detailed statement of what you did and why along with the documents to prove the changes.

[David1980]

Submitting an amended return while a return is undergoing an audit might not be the best idea - better to work with the auditor? Perhaps use a 1040-X like a worksheet and provide it to the auditor?

[S T]

I agree with David1980 - when in audit or cp2000 notice, I obtain the documentation from the client for the items in question, use my tax program to make the changes for Amended (not filing - use as my reference point), then I submit to IRS a detailed outline and any documentation to support (not the 1040X) Excel spreadsheets are sometimes helpful along with possibly corrected schedules.

Good Luck

Sandy

[Snaggletooth]

Amended Return

One of the questions on an amended return is whether the year in question is under audit. This tells me an amended return would be useless at this point.

Reading between the lines, the mess sounds like it might be deliberately created by either the taxpayer or the employer. You've got to wonder about the concept of an accountable plan and whether the employer even knows or cares about having one.

Sounds like a massive reclassification between Schedule C expenses and 2106 expenses, and auditor should create a cancellation of the 1099 issued to the taxpayer. If all relevant expenses were reported on the Sch C, then the taxpayer will end up owing some tax due to the 2% ding. If he reported profit on his schedule C, there should be no self-employment tax.

The previous preparer obviously didn't handle the situation correctly, however, he/she might have been beguiled into a Schedule C for fear of the 1099 matching process.

The discoveries here should lead to an audit of the employer. But my experience with auditors is they will not wander out of their workload determined by selection criteria even though they know there would be recovery.

[JenMO]

the employer has changed the accountability plan, in 2015 excess mileage was put into wages. but, I still have to deal with the audit. I will try to call the audit number and get some guidance. I really believe the 1099 should have been reported on the 2106, but I don't know how that is reconciled with IRS and 1099's. TP is going to owe and he knows it, but am going to try and get some abatement as the preparer did the return wrong.

[DaveinTexas]

Amended Return

I don't know if an amended return would be useless. If you could be completely up front with the the auditor, tell them what would steps would be necessary to correct the issues on the return and present to them an amended return with the proper changes/adjustments (in other words, have your stuff together and be well organized in the audit) this could bode well for hopes of the auditor waiving the Accuracy Related Penalty. The time to ask for waiver of the penalty would be during/prior to the close of the audit. The Amended Return could serve the auditor well as a guide as to what changes need to be made BUT they more than likely will make their own changes and disregard the amended return (not process it).

However, since you didn't mention whether the audit was via correspondence or a sit down meeting (office audit), it may be worthless to send the IRS an Amended Return. If you are actually are meeting with someone then the Amended Return might be helpful to have in hand at the first meeting. And the amended return would not be "qualified" unless the client wasn't already contacted by the IRS (you can avoid the accuracy related penalty with a qualified amended return).

**Just a side note regarding the idea of using the "reliance upon a tax adviser" idea to establish reasonable cause, you may want to review the 2013 Neonatology Associates, P.A. Case. In the case, the Tax Court explained that for a taxpayer to rely reasonably upon advice to potentially negate a section 6662(a) accuracy-related penalty the taxpayer must prove “(1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s judgment.”

Lastly, it might also be worth to note the client's sophistication and knowledge, or better yet the lack thereof, of the tax rules associated with taking these types of deductions; hence the heavy reliance upon the adviser would be necessary. "My client is a telephone booth repairman, what the heck does he know about taxes???"

Good luck to you!

[JenMO]

I did get to talk to IRS, and she said although an amended return probably wouldn't be processed, I could send along with my documentation to show where the deductions should been. I am going to put on the forms "For information only" We are going to send lots of documentation and probably fax. The deductions in question were the additional expenses on the Sch C, and he has his documentation. the rep was very helpful, although I did have to wait quite a while to talk to her.

[DaveinTexas]

Bingo

was his name.....O!