Audit advice

[mhcpa1964]

Hello all,

I'm seeking comments regarding a current IRS audit. Client is being audited for 2019 and the agent has also requested 2018 information. I prepared the 2019 while another company prepared prior years. Client is in the transportation industry.

In 2018 depreciation of $1115 was taken on a business vehicle that was sold in 2017. The auditor requested the depreciation schedules for both years. Client did not tell prior firm about the sale and so it was never reported on a tax return.

The reality is the vehicle was sold in a year prior to the audit periods. My question is what year should I tell the auditor the vehicle was sold? If I'm honest to the agent and use 2017 as the sale year, will that cause tax year 2017 to be auditable? The client understands the likeliness that the agent will disallow the 2018 depreciation and therefore cause a tax imposition.

Thanks in advance for your input

[Uncle Sam]

"If I'm honest to the agent and use 2017 as the sale year, will that cause tax year 2017 to be auditable?"

You are stuck either way. Since 2017 depreciation effects the 2018 depreciation, 2017 is still auditable.
Why wouldn't you be honest? Do you think that IRS won't check DMV records for title, insurance and maintenance records for both years?

I had an audit years ago of a client whose tax return I didn't prepare that had a 6 digit capital loss carryover in a prior year that carried over to the audit year.
IRS insisted on seeing the back up calculation for the LTCL carryover from prior year. The audit year also had a humongous loss. Even though the audit
wasn't effected because the $ 3,000 max capital loss, IRS greatly reduced the prior year capital loss carryover because of insufficiency of records.

[TaxGuyBill]

Be honest, but don't volunteer information. For example, in regards to the vehicle, you could say something like "Yeah, that was a mistake, that vehicle was not used for business in 2018.". But you don't necessarily need to say it was sold until asked for more details.

[mhcpa1964]

Thank you TaxGuyBill. That's useful information!!!

[ATSMAN]

Be honest, but don't volunteer information. For example, in regards to the vehicle, you could say something like "Yeah, that was a mistake, that vehicle was not used for business in 2018.". But you don't necessarily need to say it was sold until asked for more details.

I agree. Don't make up facts, just respond to the point. If he asked for dep. schedules then just give your plain vanilla dep schedules. I always ask my clients to go over the list of assets and tell me which one was taken out of service for any reason.