OT: Getting Audited by Uncle Sam - Advice?

Submitted by Raback Omaba on August 23rd, 2012 at 11:31 PM
I just got the letter in the mail notifying me that the IRS would like to audit my tax return from 2010. I am self employed, do decently well but am far from a big shot. Also, I don't have anything to hide as far as malfeasance or criminal acts go. That being said, I am still shitting myself right now.

Any advice from fellow mgobloggers on the process?

Also, I am a Detroit area resident and have decided that I should get professional representation - any recommendations?

Goal is to get this out of my hair as quickly as possible.

Sorry if too OT

Comments

JDVan

August 23rd, 2012 at 11:39 PM ^

Answered your own question. Go for professional representation who can analyze the details of your specific situation. Look for firms with reps who have IRS experience and you should be fine if you're not hiding anything. Might have to pay a fine.

ckersh74

August 23rd, 2012 at 11:42 PM ^

And make sure you have your record keeping in order. One of the first pieces the IRS is going to ask for is your bank statements to make sure that you are not understating income. For example, if you've reported $90K in gross receipts, and there's $175K in deposits going through your accounts for the year, you better have a damn good explanation as to why. 

Overstating deductions is one thing. Underreporting income is another matter altogether. 

Best of luck. 

jcgold

August 23rd, 2012 at 11:39 PM ^

Did you prepare your own tax returns, or did you hire an accountant? Is the IRS auditing a specific piece of your return, or your return in its entirety? (if you'd rather answer these in private I can provide an email address/you provide an email address)

Although unlikely, the IRS does pull people at random for an audit. So your selection may have nothing to do with anything you did: you may have just won the IRS lottery.

sheepdog

August 23rd, 2012 at 11:44 PM ^

Accountant here as well.  Paper audits are fairly common, even moreso with self-employed.  Usually just want to verify a specific piece of the return.  Wouldn't sweat it.

If its a full audit - If you hired a tax accountant to file your return, that would be the first place to start.  they should represent you.

MGoSoftball

August 23rd, 2012 at 11:42 PM ^

own taxes and mine are complicated.  I made a mistake once on my 1040.  I went back and forth with them.  Finally after 6 months the supervisor called me to explain what was wrong.  I made a math error....I did not carry the 1 literally.  I owed $3000.  They worked with me and even offered me a payment plan.

My advice:

1) make sure you know why EXACTLY the reason they are auditing you.

2) Put everything in writing CMRCR when you communicate with the IRS.

3) If you dont understand the issue take it to whomever did your taxes.  If they dont understand, get help.

4) If you do understand what happened, try to correct it. Work with them.  NEVER ignore them.  IRS does NOT need a court order to come and take your $hit.

Bottome line:  If you are correct, stick to your guns.  If you are wrong, cry, beg, plead, offer your Michigan Tickets....err nevermind.  Keep your tickets, go to jail instead.

The IRS is friendlier but only to a point.

 

MGoSoftball

August 24th, 2012 at 11:19 AM ^

uses statistics for most of their audits.  Only a hand-full are pulled at random.

That funny little gadget called Standard Deviation is in play here.  The IRS does not publish its auditing criteria but some believe that any deduction over about 2.7-2.9 sigma, gets a "hard" look.

Why do you think they ask you for your occupation on the 1040?  So they can compare you to everyone else in that occupation.  I always list my occupation as entrepreneur or capitalist instead of engineer.  I have a friend that list pornographer.

ChiBlueBoy

August 23rd, 2012 at 11:46 PM ^

Getting representation is a good idea. If you have nothing to hide, then just lay everything out there. They audit folks at random, but based on a score for likely issues. In other words, vanilla returns are less likely to be audited. Being self-employed automatically makes you more likely to be audited. As long as you aren't hiding income or assets, you'll be fine. You may have to pay some, but they'll give you a payment plan. Be forthcoming. Be friendly. Don't screw around or waste their time. You'll be fine.

Urban Warfare

August 24th, 2012 at 12:17 AM ^

Get representation.  Listen to them.  If and when you meet the auditor, do not tell the auditor that he is a complete s**thead and can go f**k himself. (I had a client who actually did that once.  It didn't go well for them.)

GBU-43

August 24th, 2012 at 12:28 AM ^

Stop sweating it if you didn't do anything wrong.  If you had an accountant or tax agency do your return then they should also provide support in any audit.  These audits rarely result in a final determination.  They will raise questions and you will have time beyond any face to face meeting to provide answers and or justify.  Always keep good records especially when you are self employed. As you state you did nothing wrong so nothing to sweat.  Right?

   

turtleboy

August 24th, 2012 at 12:35 AM ^

Definitely hire a professional. Parents owned their own business once and one year the IRS decided they were owed a specific amount. Parents checked all their work, proved they owed nothing, and the IRS relented. Next year the IRS said my parents owed them the equal amount, but from a different angle. My parents again went over their records, proved they owed nothing, and went on their way. The third time the IRS tried to get this same amount from my parents they pulled a Lance Armstrong, gave up, and paid it. It's a lot easier to hire a professional. They carry some weight that the IRS will respect.

StephenRKass

August 24th, 2012 at 5:16 AM ^

I just had a dispute with the State of Illinois IRS. As it turns out, I partially underpaid, but they also made errors. I provided documentation, laid out the math for what I needed to pay (about half what they calculated,) sent in a check, and that was the end of it.

One irony that mades me smile:  your username, in juxtaposition with the statement, "Swear to god, it seems that being self employed just is not worth it these days." I won't take this far down the political road, but will merely observe that many of a particular political persuasion would fully agree with your assessment.

ChuckWood

August 24th, 2012 at 12:44 AM ^

Okay, I'm glad you asked.  This is what you need.  A paper shreader, a few gallons of bleach, and 2 bags of hair.  This will certainly take care of your problem. 

B-Nut-GoBlue

August 24th, 2012 at 1:07 AM ^

Time to call the Wolf.

Sorry.  Sounds like you've got some sound advice, above.  I've nothing to offer but a movie reference that really doesn't even fit.

MMB 82

August 24th, 2012 at 2:27 AM ^

Eat lots of garlic, and don't brush your teeth. Roll around in some shit. THEN go in to see the IRS. Your audit will be over in no time, trust me.

NoMoPincherBug

August 24th, 2012 at 3:42 AM ^

I was audited back in 04.  I won the audit and got off 100% scott free, as I should have.  Here is how I did it:

I was working in outside sales, and making a modest living at the time.  The IRS got up in arms over my business deductions, including my car which I used mostly on the road selling.

After receiving the letter of notice of the audit, which told me that I needed to appear at their office in Long Beach (I live in So Cal)... I immediately went in to 'fight back' mode.  This is a mode that I get in to when organizations fuck with me.  I am currently going throug a situation with Equity Residential, the landlord here and am in 'fight back' mode with them too. It is a necessary thing, as consumers get walked over again and again by large corporations.

Anyway I told this IRS agent Joe that I was 100% innocent and had all receipts to back it up.  I excercised my right to bring a tape recorder to the proceedings, and I told him that I would be doing so. 

I got all of my receipts, mileage logs etc. together and practiced what I was going to say and was very detailed and organized in advance. 

On the day of the hearing, I went down to LB...but could not find the building!  Although it was in a decent size building with many floors, there were no signs on the building and it was totally non descript.  I walked around until I found it.  This being post 911, there was a security guy and metal detector.

He told me to put my cell phone back in the car and would not let me take the recorder in with me.  I told him that it was my right to take the recorder in, so he called upstairs while I went back to the car to put my cell phone back.  When I got back, he said that he got the OK to let me bring the tape recorder, but an IRS agent would have to come down and escort me upstairs.

This 20 something female agent came down, and her name was Dana.  She was decently pleasant and we went upstairs.  The IRS office was TOTALLY bare of any identity at all....just rows and rows of wooden desks and white walls.  The only photo on any of the walls was of GW Bush.  It was sort of creepy to say the least.

She took me in to a small white room and went to get Joe.  Together they came in.  I laid my tape recorder on the table and pushed record.  This seemed to get their attention FAST because they now knew that I was recording every word that they said.

They went down my 1040 return and worksheets line by line demanding proof of everything.  I was like "Bam!" laying down receipts and documents to answer every charge.  Honestly I was totally defensive, not vulgar but very firm in answering back to them in a businesslike manner. 

After about an hour and a half, they excused themselves and left the room.  When they came back, they told me that I had won the audit....they told me that this almost never happened and they actually congratulated me on my preparation.

The mood lightened considerably and I was joking with Dana on the way out... I asked her if they were going to send me a letter to document that I had won and the charges dismissed.  She laughed and said, no that they normally did not do that. 

However 2 weeks later, I got a "congratulations" letter from Dana which actually was sort of cool to see.  The whole thing was a hassle but a learning experience.

Be prepared.  Be professional but on edge.  Record everything to tape or digital recorder and be sure to tell them 10 days in advance that you are excercising your right to record the proceedings.  Advance notice is required but be SURE that you have your ducks in a row and say nothing incriminating on tape.  In my case, I knew I had nothing to worry about...but if you have any doubts on your own situation, you may want to avoid recording the proceedings because they will record you back.

Good luck...let us know how it turns out.

San Diego Mick

August 24th, 2012 at 4:58 AM ^

thanks for sharing, however, I kept wondering if Dana was cute and were you gonna ask her out or something.......and then write it off as a business expense, ah, just kidding.

Also, I'm self-employed and read this thread intently and was thinking oh shit, I better have my paperwork straight, fucking taxes man.

San Diego Mick

August 24th, 2012 at 5:39 AM ^

I was joshing ya about the Dana thing.

I don't blame you for responding to that jerk-like response and neg-banging him for his comment. You took the time to share insight and help a fellow M Fan. good on ya buddy, keep it up and don't let some people bring you down or deter you from helping in the future.

SoCal is great isn't it? I know I love where I live.

NoMoPincherBug

August 24th, 2012 at 5:55 AM ^

thanks man I appreciate it.

regarding my comment to him...lately it seems that Michigan fans have been a bit too bitchy on the web (about various things) and my frustration boiled over.  I just felt that he got a little too personal and I was only trying to relay a story and be helpful.

BTW Mick... I know you from Annarbor.com...and always enjoyed your posting there...we agreed on a lot of things that happened over the past few years in Michigan football...lol you probably know who I am.

Blue in Yarmouth

August 24th, 2012 at 10:00 AM ^

Maybe it's different in the USA but here you don't "win" audits. An audit is a process that is used to determine whether things are in order and often times done with no preconceived ideas about the outcome. It isn't a trial that is won or lost, simply an investigation of documentation. I'm not trying to be a jerk, I just haven't ever heard someone say they "won" an audit and wondered if things were different in the USA is all.

bluebyyou

August 24th, 2012 at 5:17 AM ^

One thing to remember......depending upon the details of what they are looking for, if it is a small item that they claim you underreported, as crazy as it sounds it may be better to capitulate and write a check.  The reason for doing this, depending on what and how much, is that they can start looking deeper and deeper and even if you are 100 percent right, it gets expensive when you are represented.  The IRS will often settle just to get a small claim concluded.

In the future, if it is other than a very small business filing/personal filing, it may be cheaper to get a solid accountant to do your return.

Jon06

August 24th, 2012 at 6:57 AM ^

My dad is sort of lazy, so he avoids complicated calculations while doing taxes. This, along with being self-employed, occasionally gets him audited. But among the calculations he avoids are complicated deductions. So the first time he got audited, his response involved pointing out that, while he hadn't paid enough on one thing, he got more than that back from deductions he hadn't taken. The IRS had to send him a check.

The second time, a bank reported investment income as regular income. So he had to prove the bank was wrong. But he was able to do that.

So, really, I'd be prepared and then go into it curious about what they think they found. Be prepared for them to be wrong or misinformed. I don't know how your interaction will go, but my parents' disputes were all resolved by mail.

Representation is probably a good idea if your finances are more complicated than you are trained to understand well.

JeanClaudeVanD…

August 24th, 2012 at 7:05 AM ^

Go thru everything and see if you can identify any errors before the exam starts. Being upfront will save you a lot of headaches (and possibly penalties) down the road. Doesn't mean anythings wrong with your return, just some items that popped up that may be a little larger than the indusstry norm.

grossag

August 24th, 2012 at 8:43 AM ^

and I had made a mistake in how I reported a few stock sales.  I went through it all again, found out what I owed, acknowledged the mistake, and followed their instructions to fix it.  It took a few weeks to hear back from them each time but it went okay.  So my advice would be the obvious: run all of the numbers again, ask anyone you know for help, and don't worry.  I have been told that the number of audits is up a lot in the past year or two so it is no longer rare to be audited.

Maximinus Thrax

August 24th, 2012 at 8:48 AM ^

-If you took auto expenses at the standard mileage rate, be sure to have a detailed mileage log that substantiates all of your mileage.

-If you deducted actual vehicle expenses, you should also be able to substantiate business usage to the extent you deducted the expenses.

-Document the business purpose for all meals/entertainment/travel deductions before you meet with the agent.

-I have been told that agents tend to focus on auditing gross revenue.  Hopefully the total deposits in your bank account are not significantly greater than your gross receipts per your business plus other identifiable, reported sources of income.  If they are, you might have a problem.

 

-Meet with a tax professional to help you prepare for the audit.