Letter from IRS!

[Lienlord]

Got an invitation yesterday from the IRS to review my 2017 Federal Return!

Called today got a list of items they want to see proof of:
1. Advertising expense from DW's business (music studio).
2. Contributions made to our church.
3. Repair expenses to rental properties (these were more rehabs to make them rent ready, so pretty expensive projects).

They want to me to come in to their office with my proof in a month. The scary thing is they also want me to bring in my 2016 & 2018 returns! Why?

 

[Taxman59]

They are auditing the 2017 return, and if they find something, they want to be able to "get you" on the other years as well. They also will look at the other years to make sure that you are consistent in your treatment of items. When I went to the IRS for clients (CPA in my prior life), I left the other years in the car unless it was important for the year under audit (a carryover deduction large overpayment applied etc). Good luck with the visit!

 

[Sunset]

Don't forget to bring your toothbrush

 

[pb4uski]

Don't forget to bring your toothbrush

and your checkbook!

 

[Another Reader]

I'm not a CPA, but I would probably counter that by sending them copies of all the receipts neatly organized to make the audit simple and easy to do. A spreadsheet for each project with the receipt and check copies attached makes it easy for them to verify you spent the money stated on the specified projects. I would include a letter saying if, after you review this information, you need anything else, please send a list of any additional documents you would like to see. That way, you keep them from fishing through your no doubt voluminous records and it's pretty clear you have complete back up for every thing you claimed. You may not get out of the office visit, but it will be filled with a lot of "I sent you that, here it is, attached to the spreadsheet."

ETA: Try to find the actual receipts. Often, a credit card charge on a statement is not enough to make then happy.

 

[socca]

3. Repair expenses to rental properties (these were more rehabs to make them rent ready, so pretty expensive projects).

I don't know anything about owning/operating rental properties, but in my biz "repair expenses" and "capital improvements" are handled in a completely different manner from a bookkeeping standpoint. Thanks to the availability of Section 179 accelerated depreciation, the net effect on tax liability can be the same regardless of how the expenditures are treated.

Sorry about your audit. Remember, it's only money (and time).

 

[CardsFan]

I'm not a CPA, but I would probably counter that by sending them copies of all the receipts neatly organized to make the audit simple and easy to do. A spreadsheet for each project with the receipt and check copies attached makes it easy for them to verify you spent the money stated on the specified projects. I would include a letter saying if, after you review this information, you need anything else, please send a list of any additional documents you would like to see. That way, you keep them from fishing through your no doubt voluminous records and it's pretty clear you have complete back up for every thing you claimed. You may not get out of the office visit, but it will be filled with a lot of "I sent you that, here it is, attached to the spreadsheet."

I have never had an in person audit, so I am just guessing, but maybe they want to see the originals. Of course, the tax payer doesn't want to send the originals for fear of loosing them (or, for a tax cheat that would be a great excuse). My guess is it should not be a big deal, if you have the back-up. If you played in some grey areas (and many of us have at one time or another) you could have some tax due. My impression (from mail audits) is that prompt cooperation goes a long way.

FWIW, I think the idea of having everything in a spread sheet and easy to review is a great idea

 

[pb4uski]

.... Called today got a list of items they want to see proof of:
1. Advertising expense from DW's business (music studio).
2. Contributions made to our church.
3. Repair expenses to rental properties (these were more rehabs to make them rent ready, so pretty expensive projects). ...

1 & 2 should be pretty straight forward... if you have receipts and the expenses are what they purport to be then you should be fine... on #3, there may be questions as to whether the expenditures are repairs/maintenance or capital improvements.

This is timely... DD and DSIL are thinking of buying a rental property and I was talking with DD just this morning and advocated just investing in stocks... less hassle/effort... the chance of audit adds to reasons favoring stocks.

 

[Another Reader]

1 & 2 should be pretty straight forward... if you have receipts and the expenses are what they purport to be then you should be fine... on #3, there may be questions as to whether the expenditures are repairs/maintenance or capital improvements.

This is timely... DD and DSIL are thinking of buying a rental property and I was talking with DD just this morning and advocated just investing in stocks... less hassle/effort... the chance of audit adds to reasons favoring stocks.

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

 

[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.

 

[nwsteve]

I would hire a tax accountant to represent you. You should stay home. Anything you say can be used against you in an audit.

+1
Just be sure the CPA you send actually has previously directly dealt with the IRS personally--there is a bit of art form to success. You will, of course, still need the required docs to send with the CPA. Your absence, provides the CPA with a bit more flexibility in responding to any questions to come up.

 

[Midpack]

If your deductions are all legit and documented you have nothing to worry about, it’s that simple. If not, why?

I got an IRS nasty gram after filing one year, and it was somewhat adversarially worded, kinda sounded guilty until proven innocent. But I had bulletproof documentation, and after review the IRS dropped it, all done via snail mail.

 

[Car-Guy]

Got an invitation yesterday from the IRS to review my 2017 Federal Return!

If it's just an "invitation", I'd decline!

 

[NW-Bound]

If it's just an "invitation", I'd decline!

Does it say "RSVP"?

 

[Badger]

I have only been audited one time many years ago. I used standard deduction. Go figure. Best of luck with yours.



Cheers!

 

[freedomatlast]

Just curious if any of the following deductions were significantly different on a percentage basis in 2017 as compared to 2016 and 2018:
1. Advertising expense from DW's business (music studio).
2. Contributions made to our church.
3. Repair expenses to rental properties (these were more rehabs to make them rent ready, so pretty expensive projects).

I understand many audits are triggered when taxpayers itemize instead of taking the standard deduction and when like deductions are significantly different from year to year.

 

[JoeWras]

I would hire a tax accountant to represent you. You should stay home.

all done via snail mail.

Snail mail audits are no problem to represent yourself. In person are another level, and fairly rare.

Not a bad idea to get representation and let them deal with the IRS.

Man, I hate the fall season. This is when all those IRS letters get sent out.

 

[VanWinkle]

and your checkbook!

and a fresh pair of underwear.....

 

[Mdlerth]

Stay away from reds, they angry up the blood

If it's just an "invitation", I'd decline!

Or accept it but bring a bottle of wine as a hostess gift.

 

[ncbill]

They are auditing the 2017 return, and if they find something, they want to be able to "get you" on the other years as well. They also will look at the other years to make sure that you are consistent in your treatment of items. When I went to the IRS for clients (CPA in my prior life), I left the other years in the car unless it was important for the year under audit (a carryover deduction large overpayment applied etc). Good luck with the visit!

Yep, all the "so you're getting audited" books I've read have recommended "forgetting" to bring the other years requested.

And absolutely have a professional representing you at the audit (no need to go yourself)

 

[athena53]

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]

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]

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]

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.