Tax Examination

[wanttobelucky]

Hello All,
I got letter from IRS, asking me for the documents for the expenditure i showed on my filings. My expenditure consists of Transportation Bill, Job Supplier (work from home) which comes aroung $10,000. I total income for that year was $66000
The refund i got from IRS for that year is $2600. All my bills are small (gas bills etc) so i didn't keep track of them when i shifted to new appartment.
Can you please advice how i can answer this to IRS. Do i need to talk to any tax attroney? I WOULD GREATLY APPRECIATE YOUR RESPONSE.

[oceanlovin'ea]

Find an Enrolled Agent

If you are not a tax practitioner, then go to the NAEA website and find an enrolled agent in your area. They will be able to give you the advice you need and help you with the letter,

Linda F

[DaveO]

Get some professional advice

What you describe may just be a paper audit where you can mail documentation in. If so obtain or reconstruct records. On the other had you may have a field or office audit. Such
an audit is nothing to mess with. Hire an EA or CPA to organize your records and represent you. You won't need an attorney unless you have broken the law.

[bertrans]

examination

I agree with Dave. You're probably in a so-called correspondence audit. Reconstruct as much as you can; secure a letter from your employer attesting to two things (if they're true): (1) he requires you to make certain purchases in connection with your work; and (2) HE DOES NOT REIMBURSE YOU FOR THE EXPENSES. Whatever you do, don't ignore the letter.

[Lion]

Documents

If you charged business expenses, contact your credit card companies for copies from that year. Pull out your canceled checks. Get copies of invoices from your vendors, especially any with large dollar amounts. Some computerized businesses can run you a statement covering that year. Refer to your appointment calendar from that year to jog your memory and help you recreate your expenses and your mileage log book. You may have to pay for some statements, but it'll probably be worth the price to have most of the documents that the IRS has requested. Try your hardest to get documents for each line on your business tax return, especially the highest dollar amounts. Hire a tax professional to look at the IRS letter, your tax return, and your documentation, so he/she can help you organize.

[S T]

More Documentation

All of the above posts have provided some very valuable information for you, including possibly hiring a tax professional such as an EA or CPA to represent you.

Substantiation of business expenses are difficult at best, and the greater population of these taxpayers that receive either a formal audit or correspondence audit have a diffiuclt time in producing all of the documentation that will withstand the scrutiny of an auditor.

If auto expense deductions are a question, I can readily say that one of the items that the IRS auditor will request is repair bills, from tune ups, oil changes and other repairs for the year. Why, because the vendor providing the service is usually required on their invoice/repair bill to record the odometer reading. It is a method that IRS uses as a checkpoint for mileage claimed, whether actual receipts or standard mileage method.

An appointment log or calendar log is also essential in establishing mileage. If you can provide some type of mileage log or excel spreadsheet to establish that would be to your advantage.

Take particular note of what the IRS letter requests, usually line items on a particular schedule, in your case probably a Schedule C. For each line item that is being reviewed organize your receipts for that line item. Run an adding machine tape for the total, then staple to the receipts to show the totals - or an excel spreadsheet for that category, listing the receipts with a total.

Presentation of organization and documentation is everything when you meet with the IRS auditor, and more important if it is a correspondence audit.

Obtain receipts from your job supplier, as well as any canceled checks for payment on these amounts from your bank or record keeping.

IRS usually can not go beyond the scope of what they ask for initially on the notice letter, so concentrate on those items and try to substiantiate your deductions accordingly on the tax return.

As mentioned if you can acquire the credit card statements that would be helpful as well, as proof of expense.

It might be in your best interests to hire an outside EA or CPA service to assist you with this notification.

Good Luck,

Sandy

[Corduroy Frog]

Get Help

If you "wantabelucky" understand that "luck" has very little to do with it. The only "luck" involved in this is what auditor gets assigned to you. They range from reasonable to greedy. Understand also, that the biggest bonuses and raises go to those auditors who recover the most money.

Find a tax preparer. Do not go to a lawyer unless they are a tax lawyer. Typically lawyers know much less than we do, except for those who specialize in tax law. An experienced EA or CPA is your best bet, more than likely.

Try to have as much documentation ready for your initial meeting with the auditor. You probably don't understand how important it is to offer a quick settlement to the IRS. They don't want to drag this out, and if you think you can dribble bits and pieces to the auditor, you probably can. But this strategy takes away perhaps your biggest bargaining chip, and believe me, you don't have many. Just having a knowledgeable person with you can discourage an auditor from digging deeper, or assessing you arbitrarily.

Don't be so thickheaded that you argue small, insignificant adjustments with the auditor. If you can get out for $50 or so, just do it even if you think you can win. Some of these auditors don't like to go home empty-handed and have ways of expanding their scope or getting really picky even though for the most part they don't like to spend the extra time.

Good luck from us members of the board. But we want you to find someone to guide you through the audit. If you're "lucky" it will be because you and your representative have forged a successful strategy.

[Luis Mopeo]

Over the years I've known several clients who represented themselves at audits. In every single case I know of, the revenue agents took unreasonable positions to disallow deductions. If there's not a professional representative, the revenue agent doesn't have to think too deep, and they can say anything they want.

Ten years ago when zero percent of homes had fax machines, a self-representing client had the expense for a fax machine disallowed because he couldn't prove a business purpose. A real estate person had all mileage disallowed because she had tracked it from home each day, and was told "It's all or nothing."

I had a client with elderly parents living in her home whose mother had $3,500 in social security and the client claimed her as a dependent. The father had $7,000 in social security, and the revenue agent's position was that the father had enough left over from his $7,000 to contribute to the mother's support so the taxpayer didn't provide over half. It was ridiculous, they dragged them downtown, scared the heck out of them, and demanded a full accounting of income and expenses to prove support.

I went back downtown with them the second time, gave the revenue agent my POA as Enrolled Agent, and we were in and out of there in five minutes, and that includes small talk.

Moral of the story. Represent yourself and you'll get rolled. Hire a professional and you'll be much more likely to come out intact.

[Corduroy Frog]

Additionally

Mopeo has given glimpses of a few horror stories about self-representations.

In addition, I had a client once who decided he would try it by himself, and then if things didn't work out, he would get his tax preparer (me) to go with him on his second hearing.

Here's what happened: He met with the auditor before I even knew anything about it. Auditor assessed him for some $5500, much of it taking very extreme positions similar to those described by Mopeo. Client then called me to bail him out, and we scheduled a second appearance.

Auditor was furious my client had enlisted the assistance of his tax preparer. As far as he was concerned, the audit was over, and the assessment had been turned in to his supervisor. Once the assessment gets turned in, the auditor has to defend himself for reducing the assessment and has egg on his face for doing so. Auditor furiously held on to his positions, and told us we would have to go to tax court.

I was able to talk to his supervisor, who begrudgingly reduced the assessment by about $700. Having reviewed his records, I felt like my client was only susceptible to about $650 in disputable taxes under more sane circumstances. But the auditor threw out some $15,000 in business expenses (which WERE supported) as being personal, and assigned such things as a work van and a separate structure (garage) as having a zero percent business use.

[wanttobelucky]

Thank You all for the response.
I am just tax payer in individual status and i don't have any business. My CPA adviced me to claim the expenses as i was working as a consultant.
Now i changed my job and apartment. I have couple of credit cards and i am not sure which one i used in 2005 and not even sure if that credit card account i used in 2005 is still open.
When i called my previous employer for the letter, they said they already provided me perdiam and they cann't give me the letter. I wasn't even sure what this perdiam is at that time and at the time of filing i don't even know that there will be some thing like tax examination. I gave the expenses at my best knowledge as my CPA asked. He never asked me for any receipts or he never warned me about keeping them.

I am in total mess now. I am just starting my career and this big blow came in my way.
CAN I TALK TO IRS AUDITOR AND EXPLAIN HIM THAT I COULD NOT RECONSTRUCT THE DOCUMENT. WHAT WILL BE CHARGES IF I DO THIS (TOTAL DEDUCTIBLES ARE AROUNG $9000 AND REFUND I GOT IS $2600)
OR SHOULD I GO THROUGH TAX PROFESSIONAL.
I would greatly appreciate your response.

Thank You All SOMUCH

[Luis Mopeo]

Seek the help of a tax professional.

[jimmcg]

Go to a CPA or EA who has experience in Federal income tax audit proceedures and negotiation, both at the examination level and at the appelate level.

[dsi]

[QUOTE=wanttobelucky;40944]Thank You all for the response.
I gave the expenses at my best knowledge as my CPA asked. He never asked me for any receipts or he never warned me about keeping them.


YOU are the responsible party. Did you ask your CPA about keeping receipts?




CAN I TALK TO IRS AUDITOR AND EXPLAIN HIM THAT I COULD NOT RECONSTRUCT THE DOCUMENT. WHAT WILL BE CHARGES IF I DO THIS (TOTAL DEDUCTIBLES ARE AROUNG $9000 AND REFUND I GOT IS $2600)
OR SHOULD I GO THROUGH TAX PROFESSIONAL.


Retain an EA or CPA before you get yourself into further trouble.

[thomtax]

Responsibility

YOU are the responsible party. Did you ask your CPA about keeping receipts?

dsl - your statements are technically correct. No disrespect intended, but the other side of it, imho, is that the preparer would have some responsibility to pass this information along to the client. Unfortunately, we as preparers see things so much that we begin to assume everyone should know. By going to the CPA, to begin with, the client is acknowledging that he/she does not know the ins and outs and that is part of what he is paying for. If self prepared - a different situation.

I told a friend of mine, a policeman, that he deals with criminals all the time and after a while he begins to think everyone is a criminal, even though he is only dealing with maybe 10% of the people.

LT

[JAinNC]

I agree with Thomtax that a good preparer does advise.

But sometimes even the advice and the information sheet stating to keep all documentaion .... etc - that I give to each client with my privacy policy may not be heard or read.

Wanttobelucky, you need to make some phone calls to EAs and CPAs in the yellow pages and see who is available in your area. The NAEA is a good idea but I am not sure every EA is a member. You could check out the NATP site also. It is vacation time so you may need to make several calls. Start now. And remember we get phone calls all the time - it doesn't mean you have to see that tax professional. Tell the person you help help soon with an IRS letter. If they can't see you soon enough and make some more calls.

You do need help from a professional who has experience. Take action and just find help.