Urgent!! I have a Tax audit this week!

Urgent!!  I have a Tax audit on the 9th of December!!!

Hi, My name is Bob and I have a problem. I received a letter from the IRS for a face to face audit for certain items on my Schedule C for the tax year 2008.

I have been in business for 10 years and I have been doing my own taxes every year with Turbo Tax and the records I have in my online bank account with Bank of America. I am able to keep a record of deposits and business related expenses. Every transaction that goes into or comes out of my bank accounts are itemized and categorized.

I should also mention that I am a sole proprietor.

Anyway, when I did my taxes in 2008, I went to my Bank of America account and searched my deposits for all of 2008.  There is a program where you can categorize all your banking transactions. This is what I used when I did my taxes. I took all the info off of that bank of america program. My deposits totaled $478,526.46, at least this was the figure the Bank of America software showed as correct.  I put this amount down as my total business income. I then completed the form through turbo tax. Placing deductions as the turbo tax program asked from my Bank of America online program and I completed my taxes. When I did my personal taxes part, I ended up only making 10,000.00 business income and was basically operating at a loss, which seemed reasonable since I was basically living off of credit cards in 2008 (not a good year)  I actually stopped taking legitimate deductions because I didn't want to show zero business profit (I should have realized at that point that something was wrong) but, again I was about $80,000.00 in credit card debt, so I just figured I had a worse year than I thought. I paid alot of my expenses with credit cards.

Now here is the problem, once I received the letter for a face to face from the IRS, I hired a CPA to decipher my books and basically do a internal audit and was told that I actually under reported my business income by nearly $200,000.00 and under reported my deductions by $150,000.00 plus, leaving me with a actual business income of around $58,000.00 before personal deductions. I know I will  be personally responsible for taxes and penalties and interest on a little over $40,000.00 of personal income and i have been told by my CPA that this will probably kick of a audit of my 2007  return and possibly 2006 (Yikes!) This personal audit cost me $6500.00. Now I am afraid of Tax evasion charges, even though I never intentionally under reported income but kept a horrible account for my business transactions with the bank of america porfolio software.  Believe me, I do not live a extravegant lifestyle. (Had oodles of noodles for dinner)

My question is, now that I know that i under reported by such a huge amount, should I volunteer this information to the agent when I have my face to face on Wednesday along with my CPA or let them tell me about it? Should I contact the IRS before Wednesday and tell them what I now know?

 They are asking for receipts to prove 3 line items on my schedule c of which I can produce most of  the receipts they want for those specific items, however, they also asked for my bank statements, 2007 and 2008 returns and my 1098's for my interest payments on my 2 mortgages and property taxes. I really can't get a good read on my CPA on how well he is going to handle this meeting, even though he has represented clients at face to face IRS audits. He said they will most definitley do a deposit anaylisis of my bank statements, regardless!!

He suggests we do a revised tax return and present it to the IRS at the time of the meeting and see if they will accept it.  Is this a good idea?

I have been reading things on the internet about never volunteer any information. However, i don't want to risk criminal charges, now that I know I royally screwed up, unintentional, but I screwed up just the same. I owe the money to the IRS and I want to be compliant. I am really worried and don't know what to do.

My heart tells me to come clean immediately and face the penalties and interest and ask for a payment plan to pay taxes owed.

Any other suggestions or advice would be greatly appreciated!

Acrocat:

He suggests we do a revised tax return and present it to the IRS at the time of the meeting and see if they will accept it. Is this a good idea?

I don't know the details of your case, except what has been said here. Ordinarily, however, when you have clear errors on the return (i.e. there is no serious debate about the proper treatment of the items) then what your CPA recommends is what I would suggest, too. That's particularly true when you know the auditor is going to find it anyway. If the agent is going to look at the deposits, it's reasonable to assume the underreported income will be discovered. You may not get hit quite as badly with penalties if you come in with the amended return and remove it as an issue that the auditor will have to find on his/her own. You also build credibility with the auditor that way, which can work in your favor on other items that might get raised in the course of the audit.

Of course, if there was a real risk of tax evasion charges then that would change your course of action. There would need to be more than just what you've indicated here, however, to truly raise a tax evasion issue. Simply omitting income from the return under the circumstances you mentioned is not evasion. Now, if, for example, you had taken other steps to try to hide the income from the IRS, that would be more serious, If your CPA thought that criminal charges might have been a possibility, he should have stopped all work on your case and referred you to a tax attorney. You get no CPA privilege in federal criminal tax matters, so the IRS could find out whatever you told the CPA if they prosecuted you for tax evasion. However, what you tell your attorney is privileged and doesn't present that problem.

You've hired a CPA who apparently has experience with IRS audits. Unless you have reason to believe he is not competent, I suggest you follow his advice concerning the audit.

You're obviously not looking for legal advice.

You acknowledge that you owe the money and the IRS auditor is going to be just as smart as your DPA.

My vote: Amend your return and hand it to the auditor.

Okay, I got mixed messages from my accountant. He said they may just want to discuss the 3 items on the return. He told me not to volunteer any information, but not to lie. I have no intention of lying..

So, do i wait unitl I am asked about unreported income?  I don't like that idea. In fact I have been thinking seriously about going down to the IRS office before the audit and telling somebody I have discovered that I royally screwed up my tax returns, and the 3 issues that they want to discuss are the least of my problems.

My heart skipped a few beats when I was informed of this situation. I cannot believe I did this. I have always believed everyone should pay there taxes and here I am in a situation of possible Tax evasion.

I thought I was just going to watch my accountant at work. Looks like he is basically saying i am on my own on Wednesday. I have never had an acccountant and I am not real happy with this one. He said he has represented clients at IRS audits, but now I am starting to wonder.

To add insult to injury . I have been ranting for 2 months about what Gietner and Rangle did.

...and now here am I

Acrocat:

Okay, I got mixed messages from my accountant. He said they may just want to discuss the 3 items on the return. He told me not to volunteer any information, but not to lie. I have no intention of lying..

Your accountant won't be the one on the hook if something goes wrong.

Acrocat:

So, do i wait unitl I am asked about unreported income? I don't like that idea. In fact I have been thinking seriously about going down to the IRS office before the audit and telling somebody I have discovered that I royally screwed up my tax returns, and the 3 issues that they want to discuss are the least of my problems.

You've got the audit Wednesday. Anything you do at the IRS before that isn't going to be processed for months and the audit will happen anyway and you'll have two battles going at the same time.

Again, not legal advice, but it makes more sense to me to get it all taken care of by the auditor and have an amended return for him. The IRS might be so happy with you that they'll cut you some slack on the payments. However, I suggest you be prepared to pay a good chunk of what's due pretty quick.

Acrocat:

I thought I was just going to watch my accountant at work. Looks like he is basically saying i am on my own on Wednesday.

Well, you come into this world naked and you go out the same way (metaphorically, anyway). In between you really are just on your own.

Acrocat:

He said they may just want to discuss the 3 items on the return. He told me not to volunteer any information, but not to lie.

You can do that and hope the agent doesn't discover the problem later. However, you do have a legal obligation to properly report and pay your taxes; you signed the return under penalties of perjury and you now know it's wrong. As a result, if you followed the law, you'd amend the return to properly report the income you had. But, you can play the audit game and see what happens. Maybe the agent will not catch the issue and you'll avoid having to pay that extra tax. But maybe the agent will catch it, not give you a break on any borderline deductions, and propose the full extent of penalties for it. It may also prompt the agant to start digging much deeper suspecting that there is more that you've hidden. No way to tell which way it will turn out since I don't know the auditor. As I said before, I generally advise clients that when it is clear they've made an error, they should amend the return to fix it.

What I'd hold back on are issues where there is at least an argument that you took the proper position on the return. Those are the ones that I'd wait for the auditor or agent to find first, and then we can argue about whether it's correct.

I can't tell you for sure what to do—I've not reviewed your records. You'll have to decide what you are comfortable with after hearing your accountant's proposal and the reasons why he suggests what he does.

Acrocat:

In fact I have been thinking seriously about going down to the IRS office before the audit and telling somebody I have discovered that I royally screwed up my tax returns, and the 3 issues that they want to discuss are the least of my problems.

That you don't want to do. The case is assigned to an auditor or agent for examination. He or she is the only one that can deal with the issue at this point. If you are going to come forward with the changes, then present the auditor with an amended return, ideally at the start of the audit if you can get it together by then. If you can't, you might mention to the auditor the issue and that you will come in with an amended return as soon as it can be prepared.

Acrocat:

I thought I was just going to watch my accountant at work. Looks like he is basically saying i am on my own on Wednesday. I have never had an acccountant and I am not real happy with this one. He said he has represented clients at IRS audits, but now I am starting to wonder.

The CPA should do most of the talking in the audit once your strategy for it has been set. Indeed, I generally tell clients that they need not go at all, and that it is probably better that they don't attend. Clients only need to speak if the IRS asks something that their representative doesn't have the information to answer. But it's often better for me to take the question back to the client and then we'd have the time to prepare a well thought out response—one that is accurate and truthful, but doesn't give the IRS anything more than it needs to resolve the issue. Having the client give an answer off the cuff in an audit, when the client is generally nervous anyway, risks the client saying something he or she shouldn't say. While I recommend that clients don't come to most meetings with the agent, they do have the right to be there if they want. But if they say something stupid, I'm not responsible for that :-)

Acrocat:

To add insult to injury . I have been ranting for 2 months about what Gietner and Rangle did.

And you now know that anyone can mistakes on their returns. Certainly one expects persons in high government positions to be particularly careful with their returns, but mistakes do happen. One can speculate whether they purposefully understated their taxes; so far as I've seen, there is nothing that clearly suggests that they did. They instead apparently took positions they thought were right and it turns out they were wrong.

Well, this is just great!

I just went over my 2007 taxes and I used the same bank of america program and it looks like i did the same thing on that return with pretty much the same results. Should I get a Tax Attorney. I think I may have a huge problem here.

Also , the audit is supposedly for tax year 2008, but one of the things on the list to bring is a copy of my 2008 and 2007 return. Why the 2007 return if the audit is for 2008?

Should i forget to take the 2007 return?

Bring the 2007 return if you have a copy of it. The agent will get the return anyway eventually, so it's not like you'll avoid the issue by failing to bring it. The agent wants it for two reasons. One is to see if there are any significant differences in the two years that might suggest a problem on the 2008 return. The second is to see if you've done the same things on 2007 that you did on 2008—so that if he finds problems on the 2008 he may open an audit on 2007, too.

Whether you should get a tax attorney at this point is up to you. If you have a good CPA, he can probably handle the 2007 and 2008 issues for you. Lawyers generally charge more than CPAs, but if you have particularly difficult issues, if the case is likely to go to litigation (generally only lawyers can help you in court), or if there are possible criminal issues, then you want the lawyer.

Well, i went to my audit today.

So, when i get there, the agent who contacted me in the beginning, met me and my CPA in the hall and led us to the interrogation chamber. After we all sat down, he told us that another revenue agent would be attending as well. Turns out the agent whom I was in contact with was still in training. So the senior revenue agent assisted.

How lucky is that?

So the orientation began, followed by about 2 questions, I forget what they were. I think it was the the third question that was, "Have you filed any amended returns for 2008" I answered by saying, no I did note "File" a amended return, but I have completed a amended return for this meeting.

Very abruptly, the senior agent said "Lets see it!"

She started to flip through it and while doing so, she said that a amended return could not be filed at this point. However, since we completed one she would take it into consideration for this audit.

I then told her (and showed her the print screen print out I took with me showing that figure) as to how I arrived at the original figure I placed on my schedule C. I also explained that I used the Bank of America program, and not only is the gross income incorrect, I failed to report many legitimate deductions.

Once this was established, both agents started to go over line by line, comparing what was on my original return with what was now reported on the amended return. As she was doing this, she told me that when there are differences of 25% or more on unreported income, they will automatically open a audit for the previous year and can go back for up to 7 years.

So they did the deposit analysis and at the end of that I heard a  horrible "Oh MY!"

"Okay, we have a problem here, Our deposit analysis shows that your amended return is still about $105,000 shy on the gross sales"

My heart dropped!

She then flipped around her laptop to show me and started scrolling down the screen to show me her totals on the monthly deposits. When she got to the march deposits, my eyes popped out of my head.

"Whoa, Where did you get that figure for $101,000.00 for March.

She then turned the screen back toward herself and said, "okay, it might be a typo. let see." She asked the agent in training to give her the march figure again.

Turns out it was 10 thousand, not 100 thousand. She said, see, even we can make mistakes. Then she said, good the deposit analysis matches up.

So after that she went through the deductions, and asked if i had receipts for certain items and just went through allowing and disallowing things. I thought she was quite fair and the meeting went pretty well, I thought.

It was pretty cordial and serious at the same time.

Anyway, there are some things that they need still need to see that I didn't have. they gave me a list of the things I needed at the next meeting.

(They are opening my 2007 return for audit) they assumed , and correctly so, that i used the same process to make out the 2007 return.  I expected it and they have set another meeting for the 22nd of January for that audit.

This time they suggested to do it at my office because many of my verifiable deductions are on my computer. Either that or I would have to print out thousands of documents.

I have nothing to hide, so my office is fine.

They also said they would set a date for closing the cases by January 31st and because I was forthright and cooperative with the 2008 return, the 2007 return is a far a they will go.

of coarse, this is going to cost me alot of money. (They did not say how much or anything about the penalties or interest) The Senior agent did expalin that i should pay as much as I can as soon as i can and then set up monthly payments for the remainder, but suggested I pay it off as soon as possible even if on a payment plan to avoid alot of accumulating interest.

They also gave me some tips as to how to prevent future tax problems. One of them was "Don't ever try to do your own taxes again!!

All in all, so far, I found it to be a intense experience,  but not one of the worst experiences I have had. My accountant was also great support and I' am proud of him.

So I will keep you posted of any changes and how this finally ends.

Bob

Sounds like quite an ordeal!  Wish you the best of luck with the next one (and hope that this one doesn't turn out as bad in terms of the bottom line)!!!  Thanks for sharing your story so those of us unfamiliar with the process get a glimpse of how it could work.

Hello Again

Its been nearly a year since I posted and I wanted to let you now how things tuned out since my last post.

My last audit was done in January 2010 at my office with both the senior agent and the agent in training. Again, it was not all that bad as far as the audit went. It took about 3 hours and we discussed my tax issues and the motion picture, Avatar, places to get the best deal on Leather jackets and the rain. so it was very cordial. I was approved for some deductions, disapproved for others. I had to show them some things I paid online and actually had to go to some of the websites to print statements and other receipts. they even accepted some emails from my suppliers indicating purchases. 

When it was all said and done, I ended up owing about $8,000.00 for 2007 and $14,000.00 for 2008 (Federal) I made payment arrangements and will be paying the IRS $400.00 a month until paid i full. I was accessed a 20% penalty for each year, plus the interest. These penalties & interest will continue to be added to the balance each month until paid in full.

 I then had to adjust the taxes due to the State of Maryland which totaled around $2000.00 for 2007 and $4000.00 for 2008. The state of Maryland is taking a payment of a little over $500.00 per month for 12 months, which I just started paying in this month.

So all in all, things are back to normal. It will just be costing me the $400.00 a month payable to the IRS for the rest of my life. A small price to pay to keep them off my back for awhile.

Oh, and I now have a  accountant that keeps me straight once a week.

My only advice to you small Business owners out there is this. If you do not have an accounting degree, don't do your own tax returns and also, keep your friends close, but keep your receipts closer.

Thanks for listening and have a great Holiday !!

Bob

Acrocat:

When it was all said and done, I ended up owing about $8,000.00 for 2007 and $14,000.00 for 2008 (Federal) I made payment arrangements and will be paying the IRS $400.00 a month until paid i full. I was accessed a 20% penalty for each year, plus the interest. These penalties & interest will continue to be added to the balance each month until paid in full.

That's about what I'd have expected given what you said at the start of this a year ago. The 20% "accuracy penalty" is a one-time penalty. It's pretty much automatic when you signficantly understate your income. There is just one penalty that will continue to accrue on the liability: the late payment penalty. But if, as it sounds, you got the installment agreement in place before the IRS sent you a final notice by certified mail threatening to levy to collect, your late payment penalty will only be 0.25% per month on the outstanding tax (it is not compounded on penalty and interest). That means you are paying just 3% a year for the late payment penalty. Moreover, once the late payment amount has reached 25% of the tax, it will stop, assuming you've not paid it off by then.

The other charge that will continue until paid is the interest. The interest is computed on the entire balance owed and it does compound daily. The rate of interest is adjusted quarterly, based on changes in the short-term federal rate. Currently, that rate is 4% per year, which is an effective interest rate (taking into account the effect of compounding) of 4.08%. What this means is that the penalty and interest that will continue to accrue on the account, for now, is less than 7% (since the penalty runs only on the tax).

So, add 20% to the $22,000 tax for the penalty and 7% for the roughly 20 months of interest already accumulated so far and your balance now is (very roughly) $28,000. At $400/month and assuming the interest rate remains the same, it'd take 90 months to pay it, or 7.5 years. My point in running this out was to show that it won't take the rest of your life to get this behind you. A little bit longer than paying off a car, really. Not so bad when you think of it.

Have a happy holiday!

parkersharon32:

Get in touch with a good business attorney and let him/her take care of the legalities. They are very skilled in tax matters and can deal with legal uncertainties better than you.

You do realize that you responded to a thread that is over a year old, and that the poster had come back to say that the situation had been resolved, right? So your post is too late to be of any help to the original poster.

As to your advice to see a "business attorney" on a tax audit or other tax matter, that is not very good advice. Tax law is a very complex and specialized area of the law. A typical business attorney is not qualified to assist in most tax matters as he/she lacks the in depth knowledge of tax law and procedure that is necessary. What you want is a tax attorney—attorneys that are specially trained and experienced in tax matters. Most tax attorneys have a masters of law (LL.M) degree in taxation. The LL.M is a graduate law degree beyond the basic JD degree that nearly all lawyers have, similar to a degree in a medical speciality that doctors may have. Tax is the only area of law in which a LL.M is virtually mandatory as most law firms and government agencies hiring tax lawyers require it. That's an indication of the high degree of specialized knowledge that tax law practice requires.