Got Audit. Help Please!!!

[emptyhead]

Glad to find this great place to ask help.

I received an IRS letter to audit my 2004 Schedule C. I have a small home business for ebay selling and prepared the tax return by myself. There is basically no bookkeeping for the business. Now after I got the letter, I estimated that I underreported about $20,000 business income in the year 2004. Year 2003 is worse as I might've underreported about $35,000 income. Year 2005 should be fine. I have no intention to underreport and it was a result of no bookkeeping and I filed the tax with guesses and estimates.

My EA asked me to gather as much documents which I will do. And she suggested to refile year 2003, 2004 and 2005 and she will bring the 1040Xs to the auditor for the first meeting. Is that a good idea? Will the auditor accept them? I'm willing to pay the taxes and fines but I'm afraid to face the criminal charge.

I know I was stupid but please help me. Any suggestions and discussions would be much appreciated. I'm desperate and scared...

[dyne]

Do NOT prepare or file 1040-X returns as this simply gums up the works.
Instead have your EA prepare a worksheet or worksheets showing the adjustments to
give to the Auditor.

[emptyhead]

Thank you very much for your reply. I'm afraid that after the auditor finds that I underreported in 2004, they will open up 2003. Both the underreports are over the 25% of my income.

[Bees Knees]

I disagree

Do NOT prepare or file 1040-X returns as this simply gums up the works.
Instead have your EA prepare a worksheet or worksheets showing the adjustments to
give to the Auditor.

The 1040X is not going to muck things up if the EA gives it to the auditor, which this poster said she was going to do.

Whether or not preparing a 1040X is necessary or not, I think this poster should do EXACTLY as the EA says to do, and NOT go on the Internet looking for second and third opinions. The poster screwed things up royally. Now the services of a professional are required to straighten things out. That professional does not need her client telling her what to do, based on what you or I suggest. You would not want your clients running for second opinions and then try to tell you how to do your job.

[Jiggers]

Agree, no 1040X in advance

Have your EA prepare worksheets that show the auditor what should have been reported. Be sure to tie income to your bank statement deposits, as the auditor will require this to be done.

Also, be sure to have your EA review your business expenses related to the e-Bay income, as you may be missing deductions that might soften the tax hit.

One overlooked deduction is the mileage to the post office to mail your packages. Also the mileage to the bank to make your deposits. Don't forget the fees deducted by PayPal and the service charges by e-Bay.

If the auditor wants to audit 2003 also, have the EA do the same as he(she) is doing for 2004. But, don't volunteer this information unless the auditor opens 2003.

You are in goods hands with an EA.

[emptyhead]

The 1040X is not going to muck things up if the EA gives it to the auditor, which this poster said she was going to do.

Whether or not preparing a 1040X is necessary or not, I think this poster should do EXACTLY as the EA says to do, and NOT go on the Internet looking for second and third opinions. The poster screwed things up royally. Now the services of a professional are required to straighten things out. That professional does not need her client telling her what to do, based on what you or I suggest. You would not want your clients running for second opinions and then try to tell you how to do your job.

I totally understand your point about the trust to my EA. I'm just so worried.

[Bees Knees]

I totally understand your point about the trust to my EA. I'm just so worried.

As you can already see, you are going to get all kinds of opinions on this message board.

This message board is designed for professionals to discuss situations common to our industry. We generally do not discuss taxes with non-professionals on this site.

The reason is that people like you really do need the services of a professional, as you have figured out on your own. But we do not know who you are. We don't have all the facts. Your EA does.

If you come on here asking a bunch of questions, and then try to tell your EA what to do, she is going to get frustrated. She is going to have a better picture of the situation than any of us could have. So please don't try to tell her what to do, based on anything you read here.

Now if she wants to come on here and ask questions about how she should handle this, that is fine.

There is a reason why we don't want our clients to speak up during audits, and I'm afraid you could just make matters worse by not allowing your EA to do her job.

[emptyhead]

Have your EA prepare worksheets that show the auditor what should have been reported. Be sure to tie income to your bank statement deposits, as the auditor will require this to be done.

Also, be sure to have your EA review your business expenses related to the e-Bay income, as you may be missing deductions that might soften the tax hit.

One overlooked deduction is the mileage to the post office to mail your packages. Also the mileage to the bank to make your deposits. Don't forget the fees deducted by PayPal and the service charges by e-Bay.

If the auditor wants to audit 2003 also, have the EA do the same as he(she) is doing for 2004. But, don't volunteer this information unless the auditor opens 2003.

You are in goods hands with an EA.

Thank you for the great tips about the deductions. What is the chance for criminal charge for my case?

[Armando Beaujolais]

I agree with Bees. If you follow the advice to "Tell your EA this," and "Have your EA do that," you'll be looking for a new EA real quick.

I know how I react when my client says "So-and-so said you should do this-and-such."

I respond with "Why isn't So-and-so preparing your return?"

If your situation is as you say it is, I wouldn't worry about getting thrown in the slammer. People under report income all the time. You'll get hit with some penalties, but as long as you're ready to pay the piper, I don't think your freedom's in jeapordy.

[dyne]

I know for a fact that IRS does not want amended returns to be FILED during an audit for
the years being audited.
If amended returns are filed during an audit, they must be retreived from the service center and assigned to the auditor which can take months. Then the auditor must allow or disallow the amended returns which requires more paper work.
I have known auditors or agents who were tempted or perhaps did assess a penalty against the taxpayer merely for filing amended returns.

Overall I agree that you should do what your EA advises.

Why not suggest that your EA ask the IRS auditor if amended returns should be
filed or prepared? Preparing 1040-X's is not a problem, FILING them is the problem.

[Unregistered]

I am not an auditor, and never was. However, if I were the auditor on your case and I found such under reporting as you describe, then you can bet that I would want to see several yeras' worth of tax returns. BTW, did you grossly overstate your deductions?

[Jiggers]

No statute for fraud

My understanding is that there is no limit on how many years the IRS can go back if they want to invoke the "F" word. If there is a substantial understatement, and it appears that is the case based on your information, I would be prepared for several years of audits.

[Kram BergGold]

Amend 2003

I would amend 2003 ASAP by just mailing it in. Doing so will avoid the 20% negligence penalty for owing more than $5,000. You will have to pay the penalty for 2004. If you will owe more than $5,000 in 2005 I would amend it as well. Of course you could do nothing and hope IRS does not go into 2003 and 2005 but the chance of that is slim. I would also stall the 2004 examination for as long as possible to give time for IRS to process the 2003 and 2005 amended returns.

[jainen]

From what you describe

>>What is the chance for criminal charge<<

From what you describe, including your willingness to correct the errors, I doubt that the IRS will bother with a criminal investigation. If you have a particular concern you should ask a lawyer. Normally you wouldn't do that unless you suspect the auditor is making a referral, but if there is something you are hiding a lawyer might serve you better than an E.A.

Although generally I agree with the other comments to trust your E.A. (or else get somebody you CAN trust), I wouldn't recommend using the audit to amend years not being examined. It's fine to be prepared in case the auditor opens other years, and probably that's all your advisor was saying. There's no reason to expect the auditor will be interested in anything except 2004.

[OldJack]

Serious stuff

Sorry to disagree with the previous posters. Your CPA or EA should only be working with or for your tax attorney in this case and all negotiations by the tax pros should be thru the tax attorney. ALL paperwork (including that under current subpoena) should be immediately turned over to the tax attorney and be the property of the tax attorney for client privilege purposes.

This is a criminal case and serious legal negotiations must be considered in order to keep this client from prison time. This is not a case for a tax professional alone. Don't walk... run to a good tax attorney, not just your run-of-the-mill attorney.