Surviving an IRS Audit
No one likes to think about getting audited, but what happens if you do? Read on to learn how to survive an IRS audit.
You’ll first find out that you’ve been selected for an audit with a letter. Don’t ignore it. Don’t put it in a drawer and hope it goes away. Instead get ready:
1. Call your CPA. He’ll most likely want you to fax over a copy of the notice to review it with you. We always advise our clients to let us handle the audit for them.
2. Why were you selected for audit? Pay attention and focus on the specific items that the auditor wants to focus on.
3. What type of audit are you getting?
A correspondence audit: This is for minor mistakes and requires only that you mail certain information to the IRS. For example, maybe you forgot to attach a Schedule C to your income tax return. The matter will be closed if the IRS is satisfied with your paperwork.
An office audit: Here, you’d typically bring your tax-related records to an IRS office for examination. For example, if you claimed an unusually high deduction for medical expenses, the IRS may want to see your medical bills and canceled checks, among other things.
A field audit: Here, the auditor generally visits your home or business to verify the accuracy of your tax return. It may be possible for the auditor to visit the office of your representative, instead.
4. Know your rights. You have several rights when you’re involved in an audit. These include:
- The right to an explanation of the audit process
- The right to representation by an attorney, CPA, or enrolled agent
- The right to claim additional deductions that you didn’t originally claim on your tax return
- The right to request an opinion from the IRS’s national office on specific technical issues that arise during the audit
I’ll post more tips tomorrow.
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I just purchased my first rental house and my tenant will move in at the end of January. Right now I am cleaning it up. There are about 3 weeks left in 2007. Is it critical that I form and LLC or S-corp before the end of the year? I plan to do it but if it will not make a difference for 2007 then I will form it in 2008. So, is it important to form the LLC in 2007 from a “paying taxes” stand-point or can it wait until 2008?
An LLC won’t make a difference in your tax situation. It strictly helps with asset protection. If you’re planning to rent it, an LLC is probably the way to go. If you’re planning to flip it, then you have business income, subject to 15.3% self-employment tax, and you’re probably better off with an LLC taxed as an S Corp or an S Corp.
I’d like your thoughts on a little twist to the home office deduction. In a nutshell, if I don’t qualify for the home office deduction, can my business rent space in my house instead, just like any other lease? Would this then open up business mileage deductions between business locations, and other deductions, etc.? Or would it be an IRS business audit flag?
My business leases retail space and has space dedicated for office administration purposes. As I read the IRS publications on the home office deductions, it doesn’t appear that we would qualify because we already have office space for administrative purposes. The reality is that we do a lot of work for the business from our home and we already take business deductions and allowances for cellphones, internet, office equipment, etc.
This would be a work-a-round for others, like me, who may not qualify for the home office deduction. It would enable us to take additional deductions for the business. Or has the IRS caught on to this?
In addition, wouldn’t the rent income be considered passive and be able to offset other passive losses that we otherwise wouldn’t be able to take? The rental amount would be pretty small compared to other expenses. Would this raise big enough flags to the IRS, so as not to be worth it?