IRS Tax Audit Cases
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We understand our clients, which helps us to provide tax solutions that best fit their needs. Our ability to research and interpret the tax law helped us resolve these difficult cases for our clients. These are actual IRS tax audit cases. We omitted names and locations to protect the confidentiality of our clients.
IRS Tax Audit - Individual Case
The client is elderly and retired. The client’s only source of income is social security. The client filed a tax return with $30,000 of tax debt owed. The sad story is how the client ended up owing $30,000 in back tax debt. The client was in tears explaining what happened.
The client received a call about winning $10,000,000. The client was ecstatic. The catch was the client had to wire transfer $1,000 to secure the winnings. The calls for additional money kept coming. An additional $500 was needed to exchange the currency, then $2,000 to start the foreign transfer, and so on. This went on for a year. In the beginning, the individuals managing the winning proceeds were nice. As time went on, the individuals became more aggressive. There was a point at which the individuals were verbally abusive. The client made over 50 wire transfers to the scammers, wiping out $120,000 of retirement savings.
The tragedy did not end with losing the retirement. The $120,000 was taxable retirement income. As a result, the client owed $30,000 of IRS tax debt. The client retirement is gone with nothing to pay the IRS taxes. The only source of income was social security. There is no way the client would be able to pay back the IRS taxes owed.
- We filed amended IRS return claiming $120,000 theft loss deduction, which reduced the IRS tax balance from $30,000 to less than $1,000
- We guided the client in filing a complaint with the Michigan Attorney General
- We prepared for a possible IRS tax audit
- In response to an IRS issues a levy notice., we filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, which resulted in the case being assigned to an IRS Appeals Officer.
- The IRS Appeals Officer was unable to address the amended tax return filing, so the case was reassigned to IRS Collections. After we discussed case with IRS Collections, they agreed to place a 60 day hold on the case.
- After calling various IRS divisions, we learned that the amended IRS tax return was selected for IRS tax audit.
- We set up an agreement for the client to fully pay the tax debt owed in 120 days, which would allow time for the IRS to process the amended tax return.
- We requested that the IRS tax audit assignment process be expedited.
- We reviewed, organized, and copied all wire transfers receipts and prepared an organized copy for IRS Auditor.
- After thoroughly reviewing the wire transfers, we found an issue. You can claim a theft loss in the year of the theft only if you discovered the loss in the same year. The client wired retirement funds to the scammers throughout Year 1. The last few wire transfers occur in the last week of December, Year 1. This raises a critical question. Did the client discover the theft loss in Year 1 or Year 2? We had to be prepared to defend our position for claiming the theft loss in Year 1 and not Year 2.
- We researched tax law and court cases and found that, according to the U.S. Tax Court interpretation, theft loss deduction can be claimed in the year a reasonable person would have discovered the theft. It was our position that a “reasonable person” would have discovered the theft loss after the first wire transfer or Year 1.
- The IRS Auditor agreed with our position. The client’s tax balance was reduced from $30,000 to less than $1,000.
This was a bittersweet ending to a sad situation. On one hand, the client lost $120,000 of retirement savings. On the other hand, the client’s tax balance was significantly reduced. This was a nightmare that lasted for about two years. In the end, the client was happy to resolve the tax debt issue.
IRS Tax Audit - Self-Employed Case
The IRS selected a self-employed insurance agent for a random tax audit. The client was concerned about the audit because the business records used to prepare the tax return were inadequately compiled, so there was a strong possibility there was insufficient proof for all business expenses. The client was concerned the IRS would make major adjustments to the tax return, resulting in a large tax bill.
- We first verified the income numbers reported on tax return. This included completing a bank deposit analysis and reviewing Form 1099s received.
- We decided to completely recompile the business records. We found that, for some expense categories, the client claimed too many business expenses and, for other expense categories, the client claimed too few business expenses.
- We put together a detailed audit report with supporting documentation in order to make it easier for the IRS auditor to audit the records.
- We conducted the audit meeting as the client’s representative. The IRS Revenue Agent audited the client’s tax return and our audit report.
- The IRS Revenue Agent agreed with our audit report. This included reducing expenses where too much was claimed, and increasing expenses where to little was claimed.
The client did have to pay a little more in taxes due to the adjustments made by the IRS. However, the amount of taxes owed was significantly less than the client had feared they would be. Because our report was so thorough, the IRS Revenue Agent decided not to expand the scope of the audit to two more years. The client was ecstatic because the tax bill was small and there was no need to prepare for an audit of two more tax years.
After the audit, we continued to help the client. We provide guidance on keeping good records. We also prepared the client’s yearly tax returns and restructured the business to reduce the client’s liability exposure and save taxes.
IRS Tax Audit - Business Case
The client was in the middle of a business tax return audit. The CPA who had prepared the business tax return assisted the client with the audit. The CPA made a significant mistake on the tax return, which resulted in the business owing about $60,000 of additional taxes. The CPA told the client that nothing could be done and to write a check. The audit was not fully completed. The client hired us for a second opinion.
- We analyzed the proposed IRS tax audit report and business tax return, and immediately noticed the significant error made on the tax return by the CPA.
- All was not lost as we decided to dive deeper in the situation by reviewing the business tax returns for the last 10 years. The client had changed CPAs during the past 10 years. Whenever a client switches to a new CPA, things can be missed.
- Based on our deeper investigation, we found a counter to the IRS tax audit report that would reduce the tax bill from $60,000 to about $25,000.
- We prepared a case for our findings and presented the case to the IRS Revenue Agent. The IRS Revenue Agent accepted our counter proposal.
The client was appreciative of our efforts and gladly paid the reduced tax bill. We then helped the client make sure a similar mistake was not made on future business tax returns.