A Challenge Met Head-On

Written by: Dale Howell, EA   

The IRS was auditing these members for two years, but they had only purchased a membership for one of the years in advance. As a result, instead of the low membership fee that most of our members enjoy, our services were $1,885.95 for the year for which they did not have membership. I wanted to save them more money than they had paid us for the help, so this case was a real challenge.

The audit was focused on the members’ businesses and itemized deductions. They had attempted to handle the uncovered year on their own and had met once with the IRS examiner. But the meeting hadn’t gone well at all, and by the time I started working the case, the examiner had disallowed the entire Schedule C business loss under the Internal Revenue Code section 183 hobby loss rules.

It was a 2008 and 2009 audit, and since 2006 they had been reporting only minimal income and had not shown a profit. They had claimed expenses for a handyman business, a house and car painting business, and a classic car restoration side business. Of course, the classic car restoration was the real problem. I asked the members to create a spreadsheet showing the expenses separated according to the three activities. Then we worked together to combine the handyman and painting businesses and removed some of the expenses that seemed personal and not business in nature and could be considered “unreasonable” by the IRS agent. Needless to say, I was able to reverse the sec 183 decision and keep a small loss each year on the business.

The members had deducted a lot of medical expenses incurred but not paid, so there was nothing I could do to help them with that issue. There were high employee business expenses which were substantiated, but the examiner wanted to reduce the members’ mortgage interest and real estate tax deduction by the amount he thought was allowed for the employee office in home deduction. It was my job at that point to explain to the examiner that the mortgage interest and real estate taxes were not included in the employee office in home deduction, and that he was confusing the employee home office deduction with the self-employed home office deduction, which is calculated differently. It took quite a bit of persuasion and education to get him to finally agree with me and allow all the mortgage interest and real estate taxes as originally deducted on the return.

I convinced the examiner to abate the 2009 penalty of $600, but not the penalty for 2008. The reason he said he wouldn’t abate the 2008 penalty was that the member had deducted a lot of medical expenses in 2008 that had been paid by a loan in 2007. During her initial meeting with the Revenue Agent, the member had told him she had worked for a very large and well-known tax preparation chain as a tax preparer some years ago. The examiner felt that, because of this experience, she should have known better. This is a perfect example of why taxpayers should never represent themselves in audits. If they had called us first, the examiner would never have received that information, and most likely we would have been able to have the penalty removed.

Once we finally came to an agreement, the examiner told me that he had been in my position for most of his career and that he wanted me to know that he admired how hard I had fought for my clients. He said I’d done a very good job.

The overall amount of savings the members received, based on the bill they had when they came to us, was $4,229.48. Even though they paid $1,885.95 for audit defense instead of the usual low fee that is available when it is purchased in advance, the members were thrilled with their decision to get us involved.

No Stranger to Kindness

Written by: Mark D. Olander, EA, USTCP   

Most of us are not comfortable speaking about our personal problems with anyone other than family and close friends, but situations sometimes arise in which we have no choice but to disclose private details about our lives to strangers. The IRS has a way of putting us in that position when they audit our tax returns. This month’s case shows how an Audit Representative from TaxResources provides the support you need when an intrusive IRS audit happens to you.

The members, a married couple, received a letter from the IRS requesting information to substantiate the medical expense deduction reported on their 2007 tax return. Even though it did not come as a complete surprise, they felt the same panic most people do when they receive an IRS letter. They were relieved to find their Audit Defense certificate at the top of their tax file, and the husband volunteered to be the main contact with TaxResources. He called right away to report the letter.

The Audit Representative assigned to the case was congenial, and the member felt at ease speaking with him. He explained that the $55,000 medical deduction was the amount he and his wife had paid to send their two teens to a special boarding school. The family had been in crisis that year. Both children had been having behavioral problems, and they had found a school for them that addressed the myriad psychological issues faced by troubled teens. The Audit Representative explained that to support the expense as a valid deduction, they would need to provide doctors’ letters recommending the treatment and information about the program developed for the children, including details about the type of counseling that had been provided to them.

The initial letters sent by the school were not quite what the Audit Representative had hoped for. He warned the members that the IRS could disallow the medical expenses if they could not establish that the schooling provided was secondary to meeting a medical need. He asked them to request a revised set of letters addressing the medical aspect of the academy’s services, which would mean providing more detail about the specific behavioral problems faced by the children and the therapies used to address them. It was more information than the members wanted to provide, but they understood that without it their deduction would likely be disallowed. The school complied with their request and provided them with detailed letters regarding the care provided to each teen. The Audit Representative sent the documents to the IRS along with a letter explaining that the costs of the special school met the requirements of Internal Revenue Code section 213. They were deductible as medical expenses because the principal reason for attending the school was that the school had the resources for alleviating the students’ mental or physical handicap.

Almost two months later the IRS responded by disallowing the medical expenses. Along with the letter was a bill for $13,560. Both the taxpayer and the Audit Representative spent quite a bit of time trying to reconcile the amount of the disallowance on the IRS letter with the expenses listed on the tax return. Neither could make sense of it. The Audit Representative called the IRS and waited on hold for 35 minutes before someone came on the line. The agent was unable to explain the reason or amount of the disallowed expenses; she said she would put a note in the file and that someone would be in touch. After two days of waiting for a call back, the Audit Representative faxed a request for an itemization of the disallowed medical expenses. A week later the Audit Representative was able to confirm that the fax had been received, but he still did not have an explanation for the disallowed expenses. He was given the name of the examiner assigned to the case, and he left that person a message. The next day someone from the IRS called on behalf of the examiner. She said the file was being reviewed in order to provide the information that the Audit Representative had requested. The Audit Representative attempted to make contact over the next several weeks, and then one day a letter arrived from the IRS. It stated that the audit was closed with no changes to the originally filed tax return.

The members were happy with the outcome and very thankful for our assistance. Here is what they said about their experience with their Audit Representative and TaxResources:

Our Audit Rep was extremely helpful and made sure to put our minds at ease throughout the process. His attention and understanding was greatly appreciated. It made the IRS audit seem much less intimidating and stressful than it would have been without him in our corner.