The I.R.S. - it could happen to you

[littledog]

I bought a house in 1992, intending just to live in it. Gradually over time my recording studio took over more and more of it, until my girlfriend and I ended up buying a second house. (She would come home from work, and wouldn't even be able to flush the toilet if I was recording acoustic instruments...)

 

After a while, I determined that I really wasn't living in the studio house anymore, and began to deduct all the expenses (mortgage, insurance, maintenance, utilities, etc.) as business expenses. That flagged the IRS computers, and they called and said they wanted to audit my 2003 return, as well as do a walk through at my studio.

 

The agent showed up, inspected my place, spent a couple of hours poring over my bank statements and records, and finally left and told me I'd hear the results in a couple of days.

 

The next day I get a phone call, saying she was recommending an adjustment on my 2003 return. I held my breath... as she told me that with back interest I owed the IRS $68 - a result of the determination that my cell phone was being used for occasional personal use!

 

Needless to say, I was pretty relieved - but it got better...

 

The day after that, she called again, this time to say that after talking to here supervisor, they determined that it wasn't worth the time and effort to process my $68, so they were amending the recommendation to say that I now owed nothing!!!

 

Occasionally these stories DO have a happy ending!

[UstadKhanAli]

Whewwwwwww....

[MrKnobs]

Anyone here ever experienced a "self-audit?"

 

I have.

 

That's when the IRS sends you a letter "doubting" some element of your return and asking you to audit yourself. In case you agree with their assessment, they've already re-figured your return for you with the additional amount of tax and penalty you need to pay.

 

Oddest thing I've ever seen, all conducted through the mail.

 

"Why yes, upon examining your concern with my 2004 return, I still find it to be valid."

 

 

Terry D.

[Bunny Knutson]

Congrats, littledog! I thought your IRS story was gonna end a lot different that it did.

[Lee Knight]

Good on you littledog. Mine was a bit different...

 

Back in '83 I joined what was then the most successful cover band in San Diego. We'd play to 750 on the weekends and on a Tuesday we'd have 100 people or so out partying. Times have changed eh?

 

I was pulling in $750- $900 a week. I was 21 and that's in 1983 money. I was in heaven. Our tax consultant advised us on our just deductions... he was a bold man with our money. I remember one night watching the news and the news cameras were on his office downtown. I remember thinking, "Holy Crap! That's our tax guy's office!". The story went on about the guy swindling money from here and there and was missing. ???? Uh... is this a movie?

 

Then our audit came. Stage clothes? I don't think so. etc. etc. One by one, the approved write offs our "guy" had recommended were taken away... with interest and penalties. I think hit me in the area of 5k.

 

One minute I was buying girls perfume and the next I was scraping for gas money to get to the gig.

 

I wised up and got a lot more conservative (honest) with my deductions.

[phaeton]

The IRS came and audited the place I work, and after several months of enduring the auditor, they determined that THEY owed the business a feckton of money. Like tens of thousands over the course of seven years.

 

 

The funny part though? The auditor's name was "Milt", and he looked and sounded just like the Milton guy from Office Space. On his last day, we gave him a stapler as a gift.

[nat whilk II]

Originally posted by MrKnobs Anyone here ever experienced a "self-audit?" I have. That's when the IRS sends you a letter "doubting" some element of your return and asking you to audit yourself. In case you agree with their assessment, they've already re-figured your return for you with the additional amount of tax and penalty you need to pay. Oddest thing I've ever seen, all conducted through the mail. "Why yes, upon examining your concern with my 2004 return, I still find it to be valid." Terry D.

 

Well I shouldn't probably, but I'll confess that I'm a CPA.

 

Yes, the IRS has cooked up this "self-audit" routine. They are always trying to find ways to cut personnel and automate their systems for checking up on taxpayers. This is one of the latest methods.

 

Basically the IRS gets copies of your 1099s, W2s, and other misc. reports from the 3rd parties that issue them (employers, customers, brokerages, banks, universities, pensions, partnerships, etc) and they try to automate things so their computers can cross-check to see if you've reported everything from these reports on your return.

 

If their computer comes up with a mismatch or anomaly, the IRS doesn't assume automatically that you've made an error and owe more taxes - instead they send you the computer-generated letter asking you to explain why things don't apparently match up.

 

So it's not a bad idea, except it generates a zillion of these letters and creates a lot of work for taxpayers (and their CPAs like me).

 

The downside is that their letters are poorly formatted, full of redundancies and boilerplate language that is mostly irrelevant to any particular case, but confuses the taxpayer with pages of jargon. They have a great aversion to straightforward, simple presentation of things.

 

Also, some people are so intimidated by these letters that they just up and pay out of fear whether it's valid or not. Or if they are elderly, or hospitalized, etc., the time limits can run and the IRS will then assume they owe more and, if no response comes from the taxpayer, eventually the IRS will levy the money straight out of their accounts with loads of penalties and interest.

 

The bad bad thing to do is to ignore these letters. Then the IRS puts on their angry eyes.

 

nat whilk ii

[Hard Truth]

I also survived an audit with virtually no damage. I survived because I did have every required piece of documentation. (mostly receipts) Fortunately, the worst part was just the time I had to spend finding and reorganizing my documentation. The lesson I learned is: keep every little receipt etc. where you can find it readily.

[Anderton]

I set off every flag in the book: Home office, lots of deductions, foreign income, you name it. As a result I'm very aggressive with taking deductions (I deducted the cost of the light bulb I replaced over my desk that I use exclusively for work), but I also try to stay real savvy about the tax laws and am religious about entering deductions and keeping receipts.

 

I was audited twice, and in both cases, they ended up owing me money because of two computational errors I made. Then they stopped auditing me.

 

It's true that a lot of people have horror stories about the IRS, but all in all, I've known people who have gotten into trouble and the IRS was pretty good about cutting a deal that wasn't too draconian. I think as long as you've been honest, you have nothing to fear except perhaps some penalty or interest for being ignorant about some weird aspect of the law. But if there's even a whiff of fraud, they'll come down on you like a ton of bricks.

[MrKnobs]

 

Originally posted by Hard Truth I also survived an audit with virtually no damage. I survived because I did have every required piece of documentation. (mostly receipts) Fortunately, the worst part was just the time I had to spend finding and reorganizing my documentation. The lesson I learned is: keep every little receipt etc. where you can find it readily.

 

 

I'm so buried in paper that I finally bit the bullet and scanned every important document I have. The whole kit 'n kaboodle fits on one DVD along with pictures of property for insurance purposes and investment account numbers and statements for my various banks and financial institutions. Obviously the latter documents are password protected.

 

There are three copies of that DVD, one at home, one locked in a safe at work, and one at my wife's office. After four burglaries over the last 20 years, I finally learned my lesson.

 

More room in the house too, without all that old paper.

 

Terry D.

[MikeRivers]

 

Originally posted by nat whilk II Basically the IRS gets copies of your 1099s, W2s, and other misc. reports from the 3rd parties that issue them (employers, customers, brokerages, banks, universities, pensions, partnerships, etc) and they try to automate things so their computers can cross-check to see if you've reported everything from these reports on your return. If their computer comes up with a mismatch or anomaly, the IRS doesn't assume automatically that you've made an error and owe more taxes - instead they send you the computer-generated letter asking you to explain why things don't apparently match up.

I got one of those a couple of years back. I didn't know it had a name (or maybe it didn't back then). Just so I can keep track of money that I'm making, I enter it as income when I send the invoice, and that's what I use as a basis for paying my estimated witholding tax. The companies that pay me enter the payout when they send the check.

 

I had a sizeable invoice for a client in December, and that's when I counted their money, but they didn't pay me until January. So the next year, that large January payment showed up on their 1099 but I didn't report it in that year because I reported it the previous year. I called the phone number on the IRS letter and spoke to a very nice person. I told her that I could explain the discrepancy but I didn't know what kind of documentation I could submit to back it up (the letter requested documentation). I explained the reason for the discrepancy and she said "Ok, OK. No problem. We'll just close this out now." and II never heard about it again.

 

I guess they can be pretty reasonable if they don't think you're intentionally cheating them.

[littledog]

I should add, in light of Mike R.'s comments, that I too felt in no way that I was being victimized. The auditor was a very friendly woman who did not try and act intimidating or even aloof. Maybe I was lucky in that regard, but I never felt like someone was trying to make their quota at my expense.

[amplayer]

The policy of the IRS: You're guilty unless you have overwhelming proof that you're innocent.

 

The following is an account of my IRS horror story.

 

In the year of 2000, I happened to make WAY more money than normal. That year, I paid a TON of money to the IRS. Funny thing was, the IRS did not cash my very large check to them until the middle of July that year. I tried to call them in May and June to inquire about why they hadn't yet cashed the check, and nobody was willing to give me an answer. They weren't even willing to say whether or not they had received the check, although they did admit receiving my tax return. Needless to say, I was worried.

Well, they finally did cash it in the middle of July, and I figured all must be well.

Unfortunately, in August I received a letter from our buddies at the IRS informing me that my return was 3 months late and therefore I owed a 10% penalty and interest which was accruing daily at the rate of 10% as well. For those of you who don't know, the penalty and interest is based on your entire tax liability for that year. Needless to say, it was a lot of money.

 

Thank God I sent my tax return in via registered certified mail.

Thank God I sent my tax return in via registered certified mail.

Thank God I sent my tax return in via registered certified mail.

 

My tax accountant told me I needed produce:

1) The documentation from the post office verifying I really did send in my return before the April 15th deadline.

2) A copy of the cashed check (this was not easy to get)

We then drafted a letter to the IRS and sent it (registered and certified) along with my documentation. The letter cordially informed the IRS that I was not delinquent and requested they fix the problem.

About a month and a half later, I received a letter from the IRS. It informed me that my penalty and interest had been "reduced" and that I now owed nothing. They did not offer any apology or any explanation at all.

 

Thank God I sent my tax return in via registered certified mail.

Thank God I sent my tax return in via registered certified mail.

 

The bottom line is that if I had simply mailed in my tax return without getting (and saving) the registry and certification, I would have been totally liable for their error! In other words: "guilty until proven innocent".

 

Whatever you do, make sure to send in your returns registered and certified because YOU CAN NOT TRUST THE IRS!!!

[littledog]

The registered mail thing sounds like good advice.

 

On the other hand, like most studio owners who are self-employed, I pay quarterly estimated taxes. I try to slightly overestimate for two reasons:

 

1) If my income suddenly spikes way up, i will be less likely to engender penalties for underestimating the previous three quarters.

 

2) If anything, I will get a slight refund, so the scenario of amplayer [edited to correct name] probably would never apply.

 

But the story is an interesting illustration of how when you are working one on one with a specific IRS employee you may get one sort of treatment, whereas if you are going up against the whole anonymous bureacracy, you might get treated entirely differently.

[TheLuxLife]

I applied for a federal tax id #, and a sales tax id # from the state but never went any further with the business. Didn't make a dime or sell anything. A year and a half after applying the IRS is STILL sending me late notices.

 

-J.P. LUX