Letter from IRS!

[athena53]

Quote:

Originally Posted by CardsFan FWIW, I think the idea of having everything in a spreadsheet and easy to review is a great idea

I agree with this for two reasons. First, an old boss used to tell us that when we dealt with external auditors we were to answer the question truthfully, but exactly as posed, volunteering nothing else. (A friend who was preparing for a hostile court case told me that the correct answer to "Can you state your name?" is "Yes".)

Second- if you give them more they have the opportunity for a "fishing expedition". Certainly provide the receipts backing up whatever they question and whatever is in your spreadsheet, but if you hand them ALL your receipts they may go looking for trouble.

[youbet]

Quote:

Originally Posted by athena53 answer the question truthfully, but exactly as posed, volunteering nothing else.

+1

This is so true! And it's one of the reasons to hire highly qualified representation to go to the audit for you. Less chance of mentioning something spontaneously that opens Pandora's Box.

I've never been audited, or even received an inquiry for that matter, by the Fed IRS. But, I have had several letters of inquiry from the friendly folks at the Illinois IRS. A couple of those required verification of deductions and I promptly provided documentation via mail which settled those. But one letter said they were disallowing one item and my taxes were increased by about $80. Since the issue was in a so-called gray area, I just sent the $80 to end it right there. I figured there was no point in participating in further dialog and information sharing over $80.

[Lienlord]

Thank you for the responses and helpful advice! To answer a few questions:

DW's music studio has been in business for 24 years, and these expenses are average. Same for our church contributions for past 30 years. So I doubt these were triggers and are easy to document.

Now the rental property repairs, that's probably it. They singled out 3 (out of 15) properties asking backup for expenditures. These had just been purchased, and needed significant repairs to rent. They had sat empty for a few years: pipes had frozen/burst, sewer lines collapsed, electrical wiring bad, mold & mildewed walls & flooring, leaky roof, peeling paint, faulty HVAC/vents that needed repair, etc. Lots of stuff!
Every penny spent is documented to its source, and flowed out of the bank account. But there could be a question, as mentioned, of what is repair vs capital improvement.

And my CPA/EA who did my returns will attend the requested meeting on my behalf if I want her to.

[ExFlyBoy5]

Quote:

Originally Posted by Lienlord And my CPA/EA who did my returns will attend the requested meeting on my behalf if I want her to.

I would most certainly take her up on that offer. And really, since she prepared them (I am assuming) then she REALLY should be there.

DW's family has a number of businesses and has been audited three times (since I have known them). The first one, DW's Mom dealt with it (she's the overall money manager) on her own and it took a lot of time and probably took 5 years off her life. The last two were handled by professionals and she said there is no way she would do that on her own again.

[Lienlord]

Quote:

Originally Posted by Senator I would hire a tax accountant to represent you. You should stay home. Anything you say can be used against you in an audit. What percent of rental expenses compared to revenue did you report? I am typically under 15%. I often have capitalized expenses in excess of that. If you offset earned wages with a loss, that is a trigger too.

The three properties they are looking at had just been purchased and were previously vacant, so there was little rental revenue from them that year.

And my depreciation/losses did offset my earned wages, to the point that all my federal tax withholdings were refunded. So that definitely could have been a trigger, albeit one I couldn't have avoided.

[GravitySucks]

Remember to bring Walmart gift cards to pay what you owe.
That's what the phone call I got told me I had to do.

[CardsFan]

Quote:

Originally Posted by Lienlord The three properties they are looking at had just been purchased and were previously vacant, so there was little rental revenue from them that year. And my depreciation/losses did offset my earned wages, to the point that all my federal tax withholdings were refunded. So that definitely could have been a trigger, albeit one I couldn't have avoided.

That sure sounds like the trigger. They threw in the other two just because they extra rods and lures

[JoeWras]

Quote:

Originally Posted by GravitySucks Remember to bring Walmart gift cards to pay what you owe. That's what the phone call I got told me I had to do.

Have a few iTunes cards you leave in the car, as backup. Only give them if they ask.



Seriously... OP: hope things work out OK for you and you can laugh about this later.

[Lienlord]

Quote:

Originally Posted by JoeWras Have a few iTunes cards you leave in the car, as backup. Only give them if they ask. Seriously... OP: hope things work out OK for you and you can laugh about this later.

Thanks, how did you know they asked me to pay in gift cards? And who knew the IRS will meet you at a 7-11?

[GravitySucks]

Glad to see you're keeping a sense of humour.

[NW-Bound]

Wow, the government has really reduced all the red tape and is now so accommodating. They are so nice so you do not have to drive to downtown.

Instead of doing an audit at the local 7-11, I would invite them to a Starbucks, and buy them a Grande Latte. And why bother with gift cards? Ask them if cash is OK. I would think so, but could be wrong.

[Mdlerth]

Quote:

Originally Posted by GravitySucks Remember to bring Walmart gift cards to pay what you owe. That's what the phone call I got told me I had to do.

I heard they wanted the balance in Bitcoins.

[NW-Bound]

However you pay, be sure to ask for a receipt.

Not that we do not trust them, but people are forgetful. What if their memory fails them, and they call next week and ask for more money? You've got to have proof that you already pay.

[NW-Bound]

Come to think of it, is it possible that the IRS now has agents of Chinese origin, and they do not speak English?

The reason I ask is that yesterday I got a call recorded on my answering machine. That was the 3rd time in the last 2 years that I got a message left by a woman speaking Chinese.

This time, I downloaded Google Translator to my smartphone, and tried to use it to know what she was saying. The app did not work all that well. Out of a message about 30 seconds long, all I got was "... this is the last time..."

Am I in trouble now?

And by the way, I know there are two Chinese languages: Mandarin and Cantonese. Google Translator only has one choice: Chinese. But which Chinese on my phone translator app, and what language is the recorded message?

I am worried now, not knowing what she wanted from me in order to comply.

[gauss]

Quote:

Originally Posted by Another Reader Ah, but leverage is a wonderful thing if done correctly, and much of the net income can be sheltered via depreciation.

But leverage can be used in traditional financial markets as well as real estate. Real estate fans always seem to either not know this or fail to acknowledge it.

I suspect this has its basis in the messaging of the commission sales personnel attached to the real estate industry (agents, loan originators, investment real estate seminars etc.etc.)


-gauss
"owner of 1 rental property"

[Another Reader]

Mortgages are not callable and the underlying assets are low volatility. My vacancy may go up and the rents may go down, but I'm likely not going to lose my assets, especially since I have substantial cash reserves. If you are conservative, you pay those loans off, like I have. Margin loans on stock portfolios are callable, and the stock market is relatively volatile. The income is small, if there is any, and won't help you if there is a margin call. Your reserves would have to be equal to the margin to be of any use. Completely different animals.

[Senator]

Quote:

Originally Posted by Lienlord The three properties they are looking at had just been purchased and were previously vacant, so there was little rental revenue from them that year. And my depreciation/losses did offset my earned wages, to the point that all my federal tax withholdings were refunded. So that definitely could have been a trigger, albeit one I couldn't have avoided.

Repairs prior to renting get added to the basis, not expenses. That is what they want to know. The dates of the receipts vs. The rental dates.

There is a $25,000 loss limit against your income.

[euro]

Quote:

Originally Posted by Senator Repairs prior to renting get added to the basis, not expenses. That is what they want to know. The dates of the receipts vs. The rental dates. There is a $25,000 loss limit against your income.

+1 on both of those - that was the flag and it sounds like that may have been mis-filed.

[JoeWras]

Quote:

Originally Posted by NW-Bound Come to think of it, is it possible that the IRS now has agents of Chinese origin, and they do not speak English? ... I am worried now, not knowing what she wanted from me in order to comply.

In all seriousness, this scam is making a lot of money, even though they have the incredible issue of 99.2% of the calls not being understandable. The word is that the call is about a problem with immigration status. It hits a nerve on a lot of victims and is very successful.

[boont]

Last Wednesday I got a notice from the IRS saying I owed them $1203.00 and I had 15 days to pay. On Friday I got another IRS notice saying I owed $0.

I called them and was connected to an agent in St. Louis who works out of his home. "What's going on here I asked?" He put me on hold for a long time and then came back and said, "Our records show that you owe nothing." "Could you send me those records I asked" and he said he would.

"One more thing you can do for me", I said. "What's that he asked?" "Could you send me all of Donald Trump's tax returns for the last ten years?" He laughed and said, "I wish I could answer that." Turned out to be a great guy.