How can an Audit be fun (for the Audit Rep at Least)
August 01, 2013 | Written by: Jennifer Garets, EA
The Member was living in Southern California in a large beautiful home when she received a “check a box” audit for mortgage interest paid. At TaxAudit.com, we call IRS 566 Letters “check a box” audits because the letter lists all of the possible issues one could have on a return with check boxes next to each one. Above the list the letter says, “We need you to provide us with additional information to substantiate the items checked below that you claimed on your return.” Sometimes items are checked that are not actually on the tax return, which makes it easy. But in this case, I could see that the Member’s mortgage interest did appear to be quite high and that it was likely to be a problem.
The first thing I needed to do was determine if the mortgage interest was going to be limited based on the amount of the loan. When I reviewed the return it became clear that there were other issues relating to this interest. Not only was the loan amount over the $1.1 million dollar limit, but the property had divided issues. The back third of the house was a rental and there was a legitimate in-home office. This was good news, because rental and home office mortgage interest are not subject to the same limitations as home mortgage interest.
The Member supplied schematic drawings of the property and pictures of the office showing total business use, and then I devised a spreadsheet breaking out the rental portion and in-home office portion. The loan balance for the personal residence portion was still over the $1.1 million mark, so this amount was still limited.
The result was that the original bill from Form 4549, Income Tax Discrepancy Adjustments, was $31,875, but after the adjustments she will only owe $5,541.
The Member was very pleased with the level of expertise we were able to offer. And now she understands how to adjust the mortgage interest on her returns so that she can avoid this problem in the future!
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