TAX AUDIT FREQUENTLY ASKED QUESTIONS
QUESTIONS EVERYONE HAS
I’m confused. Nowhere in the document I received from the IRS or State does it say that I’m being “audited.” It states “We need more information” and “We’re unable to verify the amounts you claimed as itemized deductions” and “We’ve recomputed your return.” Is this the same thing as an audit?
Yes, absolutely this is an audit! Whether the IRS or State Governments say they are “examining you return” or that they “need more information,” it all means you are getting audited. Regardless of the words being used, this is dangerous and can cost you a lot of money.
I am disappointed, angry, stressed, scared, insecure, irritated and upset about this audit, and now I have to do a whole lot of time-consuming, tedious work. Isn’t this all the tax preparer’s fault?
The preparer didn’t select anyone for an audit. They didn’t select the timing. They don’t control the State’s aggressive computer or their policies or procedures. They prepare the best, most accurate tax return that they can, and many times, in an attempt to be conservative, claim fewer deductions than what is legally allowed.
I already paid for my tax return. Why do I have to pay extra for this?
The Audit Defense Package is an additional service, with additional costs. This is clearly stated in the Engagement Letter signed by every client, i.e. “In the event of such government tax examination, we will be available upon request to represent you and will render additional invoices for the additional time and expenses incurred.” This language is standard and is used by every CPA in the United States.
Why should I pay $275 for a binder and some dividers?
This is a significant audit defense, not just a simple binder. We have worked on this package for months, and it contains 30 years of knowledge and experience. It is highly unlikely that a beginner alone could produce the documentation that the State Government requires.
This new system is more efficient, more powerful, and more comprehensive. It has a significant amount of defensive material, including court cases and IRS rules that are in the taxpayers’ favor and are frequently ignored. More information is given on the “Why Audit Defense?”
GENERAL QUESTIONS
Do all of the numbers have to be exact to what was on the tax form?
No, if you can’t substantiate what is on the return, just substantiate what you can. However, you are entitled to claim all that you have so if you can substantiate more, do so. Now that the Audit is open you can present any and all evidence you have.
Do I have to file an amended return if I have more or less documentation than was on my return?
You do NOT have to file an amended tax return either way. Now that the audit is open, the auditor will automatically make any changes necessary depending on the documentation that is allowed or disallowed. You do not have to file an amended return.
Is there any maximum that we cannot go over for each category?
No.
Can I pay you to do this for me and fill out all the information?
No, I am unable to do this for you. I do not have all your bank statements, credit card statements, personal information, schedule, or receipts.
Should we take out the sections included in the binder that don't apply to us?
Yes.
Is there any reason you think we should consult a tax lawyer?
A tax lawyer is only useful to represent you if you are in tax court. They have no advantage over a CPA or Enrolled Agent when you are dealing with an audit or audit appeal, but they may be significantly more expensive.
What is the deadline for our response to the state?
The deadline is on the audit letter you received.
Based on your studies of government auditing practices, what do you think might have triggered this audit?
The audit letter clearly identifies the audit target. Very few audits are actually "random".
Is it true that NY State and the IRS will go back two years and make adjustments to ask for more money?
The IRS does not go back 2 years. New York State can do that. They say it in the audit letter.
Does it make sense for the audited party in some circumstances to provide a letter to explain any significant disparity?
You either prove what you claimed or they will disallow the deduction and make the adjustment. Then they will send you a bill. They will also comply with Federal and State Information Sharing Agreements, automatically. A letter of explanation will not benefit your case here.
However, it may make sense for the audited taxpayer to write a separate page of explanation to explain the context for the information shown on the tax return. This can help the auditor understand the context and reasonableness of the documentation.
For example: bankruptcy, divorce, death, significant medical problems, significant adverse business conditions, natural disasters (earthquake, flood, hurricane, tornado, tsunami, etc.)
SPECIFIC QUESTIONS
I have decided to put together a response on my own. Do you think that’s a reasonable course of action?
A regular taxpayer has very little chance of succeeding, considering the onerous requirements of California, New York State, and Pennsylvania specifically, and the IRS in general. As in any field, there are subtleties and nuances here that are not apparent to a layperson and require professional guidance. It shouldn’t be this way, but it is. This package contains built-in guidance and answers to many questions that the taxpayer doesn’t even know to ask.
What does "an explanation of how you calculated your general sales tax deduction, including worksheets and receipts for all purchases" mean?
Most tax returns don't claim this deduction; please examine your tax return very carefully. On your schedule A line 5, which box is checked, A or B? If A is checked, then that's the state income tax you paid in that year. If B is blank then it wasn't used and it's not applicable.
What if I can document a deduction on my credit card statement but have no receipt to support it?
Take the deduction anyway; list it in the appropriate category (supplies, local transportation, etc...). They may be disallowed or they may be accepted.
Are there more categories where receipts are not needed? Which exact categories?
Travel, entertainment, gift, and car as documented in IRS publication 463.
What are the expenses that have no requirement for proof?
Expenses under $75 each, such as entertainment, meals with coworkers. List the dates, who you had the meal with, where, and a value for each item.
What is the difference between 'entertainment' and 'occasional meals'?
Entertainment can be categorized as a meal or event (sports, culture, etc...) where external clients, potential business, or prospects are present with a business discussion before, during, or after.
Occasional meals can be categorized as only eating food with people you work with or coworkers where a business discussion before, during, or after takes place.
What do I do if I have multiple bank accounts/multiple different credit cards?
Copy the frame sheet page for bank accounts and the frame sheet for credit cards, then put the last 4 digits of each credit card or bank account. This is how to record multiple bank accounts and credit cards. Anything you are claiming as a tax deduction for, circle in black pen. Do not ever use a pencil, do not use any coloring ink or highlighters!
I have not received a letter from my spouses’ employer yet. What should I do if I don't have the letter?
You need it, so do your best to get it promptly.
In terms of cell phone expenses, do I include just the bills or all of the specific call records for each month?
Just the bills will be okay.
How do we divide up expenses that are shared between each of our jobs (married couple) (equipment, internet, cable, phone, etc...)
Any way you want that is logical.
What is the correct format to document cash gifts?
Cash Gifts under $75 do not need a specific receipt from a third party. You could have a notation on your calendar. You could have written a note on a 3"x5" note card. You must always supply the required information, as shown in the page for "Gifts".
According to my letter, I am being audited for Charitable Donations, Job Expenses, and College Tuition. From looking at my tax return, I see zero dollars for college tuition. I do not see how that is being audited, so can you please make sure I am reading it correctly.
The government letter is a form letter. Even though they listed that deduction in their letter, since you did NOT claim that deduction on your return, it is “Not Applicable.” You cannot prove a deduction you did not claim on your return. I don’t blame you for being confused.