IRS TAX audit cases
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Consultation and Case Analysis
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
Problem
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 friendly. 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 retirement. The $120,000 was taxable retirement income. As a
result, the client owed $30,000 of IRS tax debt. The client’s 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.
Relief Steps
1. We filed an amended
IRS return claiming a $120,000 theft loss deduction, which reduced the IRS tax
balance from $30,000 to less than $1,000
2. We guided the client
in filing a complaint with the Michigan Attorney General
3. We prepared for a
possible IRS tax audit
4. 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.
5. The IRS Appeals
Officer could not address the amended tax return filing, so the case was
reassigned to IRS Collections. After we discussed the case with IRS
Collections, they agreed to place a 60-day hold on the case.
6. After calling various
IRS divisions, we learned that the amended IRS tax return was selected for an
IRS tax audit.
7. 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.
8. We requested that the
IRS tax audit assignment process be expedited.
9. We reviewed,
organized, and copied all wire transfer receipts and prepared an organized copy
for IRS Auditor.
10.
After thoroughly reviewing the wire transfers, we found an
issue. You could claim a theft loss in the theft year 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.
11.
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.
Our position was that a “reasonable person” would have discovered the
theft loss after the first wire transfer or Year 1.
12.
The IRS Auditor agreed with our position. The client’s tax
balance was reduced from $30,000 to less than $1,000.
Results
This was a bittersweet
ending to a sad situation. On the 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
Problem
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 of insufficient proof for all business expenses. The client was
concerned the IRS would make significant adjustments to the tax return,
resulting in a large tax bill.
Relief Steps
1. We first verified the
income numbers reported on the tax return. This included completing a bank
deposit analysis and reviewing Form 1099s received.
2. We decided to
recompile the business records completely. 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.
3. We put together a
detailed audit report with supporting documentation to make it easier for the
IRS auditor to audit the records.
4. We conducted the audit
meeting as the client’s representative. The IRS Revenue Agent audited the
client’s tax return and our audit report.
5. The IRS Revenue Agent
agreed with our audit report. This included reducing expenses where too much
was claimed and increasing expenses where too little was claimed.
Results
The client did have to pay a little more in taxes due to the IRS’s adjustments.
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 audit scope 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
Problem
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.
Relief Steps
1. We analyzed the
proposed IRS tax audit report and business tax return and immediately noticed
the significant error made on the CPA’s tax return.
2. All was not lost as we
decided to dive deeper into the situation by reviewing the business tax returns
for the last ten years. The client had changed CPAs during the past ten years.
Whenever a client switches to a new CPA, things can be missed.
3. Based on our more
in-depth investigation, we found a counter to the IRS tax audit report to
reduce the tax bill from $60,000 to about $25,000.
4. We prepared a case for
our findings and presented the case to the IRS Revenue Agent. The IRS Revenue
Agent accepted our counter-proposal.
Results
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.