Help with 2006 Income Tax Return Examination

[needintaxhelp]

Please help. My 2006 Federal Income Tax return is being examined next week. They are reviewing the following issues:
1. Other Expenses Subject to 2% AGI Limitation
2. Other Unreimbursed Employee Expenses
3. Contributions

The unreimbursed employee expenses mostly refers to mileage I claimed. I do have a mileage log so I think I am OK there. I'm not sure why they refer to it as "other', but...
Under contributions, I have non-cash donations (clothes) to Goodwill that are itemized and less than $5k and non-cash donations (furniture) to Goodwill that are itemized and less than $5k also. I do not have receipts for each of these donations but I do have an itemized list of the item, description and estimated worth. I understand for tax year 06 I do not need the Goodwill receipt, right? Finally, I made cash (actual cash in the offering plate) contributions weekly to my church of $200/week for a total of 45 weeks during 06. This gives me cash contributions which each are less than $250 but total $9000. Again, I do not have a receipt from the church but since each donation was less than $250 do I need to just document (with dates and amounts) the donations made throughout the year?

Any help would be greatly appreciated! I am a little nervous about the examination and I have been unable to reach my tax preparer.

Thank you

[JSLATER]

The "other" will refer to any other expenses you claimed on Form 2106 or Schedule A. Food, overnight lodging, etc. I would think from previous experiences your contributions would be a major problem without receipts. I had a client with a church donation of approximately $4200 that was disallowed because he did not have the receipt with him during audit. The client explained to the agent he could go to the church and be back with a receipt in 15 minutes. The agent called the church instead and verified the donation. He passed the audit with no adjustments. Again, without receipts you have a major problem.

[needintaxhelp]

I understood that the Pension Protection Act of 06 would require more strict records starting in tax year 2007. Is this not the case? What was the requirement when showing proof of charitable contributions prior to tax year 2007?

[KBTS]

You audit is scheduled for next week and you are just now getting around to asking what you need to do? You should find an Enrolled Agent or CPA who specializes in tax matters to help you out on this. Going in by yourself under the circumstances you have described would be a bad move IMO.

[dodgedipduck]

To be honest, there are red flags flapping in the breeze all over the place in this one. Not saying the deductions aren't legitimate, but there are several unusual things going on here.

You've obviously read up on the reporting requirements for charitable donations, and have spent some time doing so. Yet you put in $9,000 in the collection plate over the year and didn't think to get any kind of receipt or pay by check to document the donation? That doesn't make sense. If you had absolutely no clue about the rules, that would barely make sense. it does seem like a bit of a coincidence that the amounts were just under the reporting requirement for 2006.

Do you carry hundreds of dollars in cash around all the time? Why always cash?

You didn't say what the numbers were for the noncash donations, just less than $5,000. Again, appear hiding a bit behind the reporting requirement. If you gave anywhere near $5,000 in donations, you'll have a hard time convincing any reasonable person that you gave away stuff with FMV of thousands (purchase price of tens of thousands) without getting any kind of paper trail. You already tipped your hat that you're capable of understanding the rules, yet you seem to have missed the idea of documenting the deductions?

You can bet that a central part of the process will be the bank deposit analysis. They'll look at your bank accounts (it's much easier if you have the stuff there so you can walk them through it rather than making them dig it up, because they will find it). Were you taking hundreds of dollars in cash out of every paycheck? Where did all that cash come from? Where did all the cash come from to buy all that stuff that you gave away and took a noncash deduction for?

Just because it's unusual doesn't make it illegitimate. But these are the questions the auditor is going to raise. It really doesn't make sense. The bank deposit analysis will either be you friend or your enemy, depending. It will paint a picture indicating that what you claimed is correct, or it will paint a picture of the bank account not reflecting what you're reporting.

[JSLATER]

RECEIPTS. Not that it is still available, read IRS Publication 17 for 2006, pages 156 and 157. It says basically the same thing as the 2007 Pub 17 on pages 160 and 161. Get an EA, you are in trouble.

[needintaxhelp]

I have talked to a CPA and a consultant from a Tax Representation Firm and both agreed that with less than $20k in charitable contributions that I have to show proof of, it would not make sense to hire someone to represent me for this examination. They said that if the conversation with the IRS agent starts to go bad and they start disallowing a lot of deductions that I can ask for representation.
I am really not just now looking into this. I have documentation on the majority of the items in question. I am just trying to get a better idea of what to expect.

[dodgedipduck]

Something's not right here.

[JSLATER]

I agree. Something definitely wrong.

[BOB W]

How many people do you need to tell you, you are in trouble?????

[S T]

Agreed

Did you self prepare your returns?

If you didn't self prepare your returns, why were you advised of the potential exposure to these areas of deductions, and whether or not you had the documentation to support the deductions?

You really need to find an EA or CPA in your close proximity that can represent you at the audit. You would be foolish to try to attend the audit on your own and represent yourself.

Gather your documentation, in an orderly manner, to present to the professional representation that I hope you are going to retain. You can request a postponement of the appointment date for the audit stating that you are seeking professional assistance and forwarding a power of attorney for that assistance.

I really think it would be in your best interest!

Sandy

[Bucky]

If you are unable to reach your tax preparer in January you either don't have one or you better find a new one. Sorry, I'm booked!

Did Old Jack put you up to this?

[joanmcq]

Maybe no cash analysis

They may not do a cash analysis. For EBE and charitable, they are looking for receipts, cancelled checks, etc. Can the church back you up in that you give large cash contributions? They are getting much stickier on what they will accept. A real jewel of an auditor I had kicked out even recipted donations because the reciepts didn't have the required info on them. And some were from some pretty big well known charities. How much income do you have? Is $9000 a large amount compared to your income and other expenses? For non cash, EACH contribution has to be under $250 to not require a reciept (and note the requirements have changed for 2007). Everyone is right; that's a LOT of stuff. They will look at how you valued each item too. You have a mileage log. What is your profession? Why do you have to drive so much (to trigger an audit, I'm sure you have LOTS of miles) Do you have a reimbursement policy from your employer? Be prepared to show it.

[Koss]

I have talked to a CPA and a consultant from a Tax Representation Firm and both agreed that with less than $20k in charitable contributions that I have to show proof of, it would not make sense to hire someone to represent me for this examination.

On this reasoning, perhaps you should consider performing your own dental work when it involves something as basic as filling a cavity.

They just came out with a book on how to do this. It's part of that series. You can get it at any Barnes & Noble.

Dentistry for Dummies


Burton M. Koss
koss@usakoss.net

[Bees Knees]

I have talked to a CPA and a consultant from a Tax Representation Firm and both agreed that with less than $20k in charitable contributions that I have to show proof of, it would not make sense to hire someone to represent me for this examination. They said that if the conversation with the IRS agent starts to go bad and they start disallowing a lot of deductions that I can ask for representation.
I am really not just now looking into this. I have documentation on the majority of the items in question. I am just trying to get a better idea of what to expect.

I had a client that decided to save money and represent himself at audit. I never knew he was being audited until after he called me. He said the agent was real nice; they got along great; the agent even got some free auto mechanic advice out of him (he is an auto mechanic). At the end when everything seemed to be fine and over with, the agent hands him a bill for $5,000.

I took over, called the auditor, and with only two or three hours of my time, got the $5,000 balance due down to zero. My client was happy paying me a couple hundred for the results.

The fact is, IRS auditors will try to roll you over if you are not a professional. The minute a CPA or EA gets involved with the audit, the auditor turns a different color. That is not me just blowing my own horn. That is fact. I hear the same thing over and over again. People trying to represent themselves, then when they get in trouble, an EA steps in to save the day.

I have yet to have one client pay a dime of additional tax after I got involved with their audit.