December 01, 2018 | Written by: Beatrice Sargbah, EA, CPA
With several years of audit representation experience under her belt, Judee was ready for anything that came her way. When she received a small business audit case with high travel expenses relative to a very low amount of reported income, she welcomed the challenge – even though she knew the member would need substantial documentation to prove the items in question. “First things first,” Judee thought, “let’s review this notice.”
In completing the initial review, Judee could see that the triggering factor of the audit was crystal clear. The member, who owned a consulting and education business, had reported travel expenses of $17,338 with gross receipts of $300. Judee called the member to discuss her assessment. He confirmed the validity of his entries, and Judee explained what documents she would need to respond to the notice. As with many cases, the member had some documents, but likely not enough to appease the IRS. Judee explained that though the situation was not ideal, she was happy to send the IRS what they had, but the final determination would be up to them.
Judee sent her response package, which included the member’s travel logs and receipts. It didn’t take long for the IRS to reply, disallowing the member’s travel expenses, and proposing a balance due of $8,520 (including interest and penalties). The response, though unfavorable, was expected. As far as the IRS could tell, all signs pointed to a hobby. It was now up to Judee to convince the IRS that the member was indeed running a business.
To prove this, Judee had to show that the member met the nine factors for determining whether a taxpayer’s activity is a business or a hobby. For Judee’s second response to be a success she would need to present corroborating evidence using the documents she had available – the same documents that had been of little assistance the first go around. Judee went through each of the nine factors and worked with the member to submit a vigorous response.
Judee guided the member on what to include in his written narrative. The finished document detailed how he carried on his business and the level of his expertise. He described how much time and effort he spent in carrying out the activity, the success he’d had in other activities, his history of income and losses, and the relative amounts of the profits and losses. As per the requirements of the nine factors evaluation, he also provided information about his financial status and whether the activity provided recreation or involves personal motives.
When Judee called to follow up on the second response, the IRS agent informed her that, thanks to the narrative included in the response, the case was being closed with no change.
This representation was vigorous, strong, proactive and energetic, restrained only by ethical considerations. Judee’s defense minimized the impact of an audit for our member, who was thrilled by the final result.
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