This guest post from Brooklyn Money is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes.
One fine evening late last summer, I came home from a lovely dinner with friends to find a large envelope stuffed into my mailbox. Despite my slightly inebriated state, I was able to see that the envelope was from the IRS. I’d recently sent the IRS a form and had expected to receive a receipt, but I hadn’t imagined that it would require such a hefty response.
Turns out they weren’t responding to my form. Instead, I was being audited.
Anytime, Anything (Almost)
The reason I was being audited — supposed foreign income received from an internship — was absurd. Adding to the ridiculousness was that I was being audited in September 2011 for my 2008 taxes. And here we come to our first lesson: The IRS can audit you for anything that they want to at anytime before the statue of limitations expires (three years on most things). It’s never outside the realm of possibility.
In fact, I was being audited for something that didn’t exist, by the bureau of Large Business and International Compliance. You’d think that I were a millionaire with hidden offshore assets (I can only dream) for this office to mess with my measly return, but alas that is sadly not the case.
Ridiculous or not, this was actually happening, and I had to deal with it. At first, I felt anger. Then I felt fear. Fear at the enormous amount of information requested. Because no matter the reason for the audit, once they audit you they can look at everything on your return. The amount of documentation required and the number of forms to fill out was truly overwhelming.
What Would You Do?
For 2008, I had used TurboTax to file my return. I usually purchase audit protection. When I searched through my files, I could find no evidence that I had done so for 2008. Here’s our second lesson: When you file your taxes, always plan what you’ll do in case you get audited. Because I can assure you most people’s response to an audit, even just a “correspondence” one like mine, is not “Oh yay! I would love to represent myself to the IRS.”
Previously, I’d relied on an accountant, so I made an appointment with him ($250 for a one-hour session). He calculated that the amount I stood to owe the IRS was less than what he would charge to represent me. So I was on my own after that initial meeting.
Fighting the Man
Fueled by my anger and fortified by the strategy session with my accountant, I began assembling my response. This involved contacting numerous third parties for documentation, including my employer. Embarrassingly, I had to explain to the accounting department that I was being audited and ask them to write me a letter pinky-swearing that all of my income was reported on my W2. I also had to get a letter from my boss (I wrote it and he signed it) explaining why the one non-reimbursable business expense I had was relevant to my job and swearing that it was not reimbursed. Luckily, my boss thought that the audit was ridiculous as well and didn’t look at me as if I were some kind of shady tax cheat.
In the process of preparing my response, I pored over my return again and again. In doing so, I discovered I’d been careless. Using TurboTax, I had somehow downloaded my dividend income twice. This was great. It meant that the IRS would owe me money because if the IRS finds a mistake in your favor during an audit, they have to correct it.
After about 40-50 hours, I had compiled a binder with documentation for most things the IRS requested. I sent off my response in the mail, return receipt requested.
A few weeks later I got the response to my response. The IRS denied my one non-reimbursable business expense deduction. They didn’t even mention anything about the reason they had initiated the return. Now I owed back tax and interest — and an accuracy fine!
Making Peace
I had a choice to make. Initially, I thought I would fight. My accountant encouraged me to do so. The next step would be to call the examiner, and if he didn’t agree with me, to call his supervisor. If I still didn’t get anywhere, I would appeal his decision and get a meeting with a local supervisor where I’d explain why I thought the initial auditor’s decision was incorrect. I’d found a recent tax law case that was publicized in the media. I read the judge’s decision in favor of the taxpayer and thought that my case was very similar. I was fired up and ready to fight!
And then life happened, including a lengthy interview process for a potential new job that involved cross-country travel. And then I came home to another big package from the IRS requesting that I extend the statue of limitations on my return (it was about to expire in a few months).
The next day, I gave up. I phoned my nemesis, the examiner. I pleaded: “Why are you sending me more documents? I will send you the stupid check. Just leave me alone. Why do you need more time with my return. There is no more blood to be sucked from this stone!”
The IRS auditor was possibly the nicest and most patient man on Earth. He explained that he had to send the statue extension request to all returns approaching expiration. He somewhat conceded that it was highly unlikely that I had any foreign income. And when I explained why I thought he was wrong to reject my business expense, he encouraged me to write up my case and to explain why I thought I should not have to pay the accuracy fine. When I said I didn’t have the time, he offered to consider giving me an extension. When I said I just wanted to pay my taxes and get it over with, he agreed that many taxpayers do just that.
The Bottom Line
So, I sent the IRS a check for about $2000.
Yes, that’s a lot of money and I still don’t believe that my interpretation of the tax statue was incorrect. But my hard work on preparing my response lowered the amount that I owed (probably by about $1000), so I at least felt like I had done something to combat this thing. I just didn’t have the mental stamina or energy to deal with it anymore. It had already played out over three months.
I wasn’t going to be like my hero, the taxpayer I read about who fought the IRS for years, including a team of lawyers in tax court, and came out on top. Because I value the tens (or even hundreds) of hours it would require me to devote to fighting this more than I value the $2000.
In the end, the IRS got their money, but less of it than if I hadn’t been diligent in my response. And I got to walk away with my sanity.
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“The IRS got their money”
Almost. They got your money. You have my sympathy.
Once I sold some stock for a loss and never mentioned the transaction in my tax returns. A year or two later the IRS sent me a bill for a couple thousand or so in back taxes because my bank told them about the sale but not about the purchase. The IRS’s logical response to assume that I got the stocks for free and made a wild profit on them. Fortunately I was able to resolve the issue by getting the records from my bank, but I spent a few weeks scared that this was going to break me.
I redid my return for that year using the transaction records to adjust my income down from the loss. My math determined that I was owed an additional refund – instead I never heard from them again, which was just as well in my book.
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We fought the IRS a few years ago over $1000. We were audited because they said we had not reported 1099 income. We hadn’t received a 1099 from the company in question, hadn’t earned income from it, and we had never heard of the company. I was told by the first IRS agent I talked to that we had to prove we hadn’t received the income–we were guilty and had to prove ourselves innocent. I tried to contact the company, but they had gone bankrupt, and I couldn’t hunt down any of the company’s former employees.
It took nearly a year of back-and-forth phone calls and letters–and the IRS threatening us with tax court–before it was finally resolved in our favor. There were many times I was tempted to just pay the $1000, but I knew we didn’t owe the money and was too stubborn to pay even more in taxes than the exorbitant amount we already do.
I think the IRS threatens people with tax court as a way to get them to pay up. They resolved the case in our favor after I told them I wanted to go to tax court.
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If you go to Tax Court for unreported income cases, the IRS generally must show that you received income. That is most likely why the agent went away when you pushed for Tax Court
When it comes to credits and deductions, the taxpayer generally must show that they meet the requirements
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This is terrifying to me. We just moved overseas (I am a US citizen, my husband is not), and I am so scared of getting audited. We have so little income that we are on welfare over here. (Have been looking for work for 6 months, no luck yet.) But I suspect that won’t stop the IRS.
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I think getting audited is every taxpayers’ fear, totally because of the headache involved. I would say if you are focusing on getting a new job that will pay a good wage & bring in consistent income, it makes sense to do that vs. spend your time fighting over $2k. However, if you had the time, it might be worth it to continue to challenge it, assuming it wouldn’t make you so frustrated that it would spill into the rest of your life. Sanity matters too.
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I’m pretty sure it’s a tax statute, not a work of art.
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We were audited for state taxes and they were right. But it worked out as being a pretty low interest loan to us that came due when we no longer needed the money quite so much, so we can’t complain too much.
Last year our taxes were super complicated and we ended up missing a deduction, and the IRS sent us an extra check! That was pretty cool.
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In each of the last two years before I retired, I looked over the return several times, trying to find a way to qualify for the “Making Work Pay” tax credit. Both years I determined I did not qualify, so left that off my return.
And each year, the IRS looked over my return, deciced I did, indeed, qualify, and sent me a check.
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Your story made me angry for you, just as you were angry and scared. This type of scenario is repeated ad infinitum with honest taxpayers who pony up money just to be rid of the IRS. You didn’t owe the money, but, as the representative indicated, most people just pay anyway. How ridiculous and sad this has become! Politics aside, the simple truth is the tax code is astoundingly out of control and an overhaul probably means starting over from scratch. Will that happen? Place a bet.
Also, quick edit: it’s a legal “statute” even though it seems like it’s totally set in stone like a “statue” might be. Thank you for sharing your story.
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You live in the most powerful nation on earth. A highly defended country where for over two hundred years people have worked hard and paid their taxes so that you could enjoy life as a free American.
Being audited sucks. You have my sympathy about that. But your frankly childish attitude to the whole thing seems to have made the experience much worse. As you said, when you talked to the IRS guy, he was really nice. You could have called him after talking to your attorney, found out what they were looking for, discovered that your interpretation of certain items did not agree with theirs, and perhaps you could have written your letters with explanations at that point. It was your screwup that triggered the audit – reporting more dividend income than they had records for and the audit was within the legal timeframe. Not ridiculous. To take the attitude that you were “fighting the man” when it was your own carelessness that brought this on is not a healthy way to go through life. And I am sympathetic to your having to go through the audit, because that sort of error is very easy to make.
I think part of the problem is that we have created this system where there are taxes, with “tax credits” for things we consider to be worthy. This sets up a really bad, overly complex system, with the assumption that there is some moral worth involved in how much tax people pay, that it is a punishment, rather than having citizens paying what is needed to support their government’s function.
That said, I think the real scandal is that you have business expenses not being paid for by your employer. That is what I would be angry over, not the audit.
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ITA. I never complain about my taxes, because they pay for the maintenance of my highways, defense of our country, support for he indigent, a system that keeps our food and medications safe, and many other things that are important to me.
I know several former IRS auditors who are thoughtful, reasonable people. My one interaction with the IRS beyond regular filing was without incident. If you treat others with courtesy and respect, 99% will respond in kind or try to do so.
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ITA, it is never a good idea for a taxpayer to just call someone like this. I’m not saying this particular person would do so, but often they lie. Other times you wander into a part of discussion that leads to more problems. Having an accountant call makes some sense, but an enrolled agent is better yet.
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While the U.S. tax system baffles me, I have to agree here (and I think we Canadians pay more in tax than Americans?) Taxes are important, but all the deductions make me a bit crazy!
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As a people we may have been very well hoodwinked into thinking that paying taxes is “patriotic”. Nothing could be further from the truth. Internal taxation on income did not exist but in very rare instances until the 1930′s.. Internal taxation was considered an enemy of liberty by most of the founders. Next to a corrupt monetary policy, our system of taxation is the most corrupted and immoral element of our current government. YEveryone could pay 100% of our income and still not pay for 1 year of our government’s escapades – FACT.
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“”I think part of the problem is that WE have created this system where there are taxes, with “tax credits” for things we consider to be worthy.”"
WE had nothing to do with it. I don’t remember having a say in whether any of it was a good idea, or whether it should be implemented. Furthermore, I’m pretty sure if WE wanted to change it, WE couldn’t do that either.
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Have you ever noticed the IRS preys on the “average Joe” worker who does not have the luxury of employing an army of tax experts? And then the rich and famous don’t pay taxes for YEARS or just don’t pay at all?
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“And then the rich and famous don’t pay taxes for YEARS or just don’t pay at all?”
Really? Like Wesley Snipes? Or Ron Isley? Or Nicholas Cage? Chris Tucker? Toni Braxton? Or a thousand other celebrities?
Honestly, do a little research before you say something so obviously absurd.
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I’m not sure what the lesson from this story was. Give up? I would never pay anyone $2000 I didn’t owe unless it was for ransom.
The accountant was going to charge you more than $3000 to help you? I guess that’s a reason not to use TurboTax.
This reaffirmed my reasons for using a paid preparer. Going to make my appointment now.
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I also was audited after using TurboTax for years and years. I too tried to fight. I too got exhausted from the fight and the insane amount of paperwork, so I too just paid the fine. I used to think it wasn’t worth it to pay a CPA to do my taxes. Not anymore. Although it still hurts to pay someone else to handle my taxes for me, the piece of mind helps ease the pain.
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We are going the opposite approach. After using a CPA for the past several years we are going to do taxes ourselves this year. After our tax lady messed up our return two years in a row (and two mistakes last year, one on Federal, one on the State). The last thing I want to do is be audited for someone else’s mistakes 3 years in a row. She does have aduit protection but I don’t even want to deal with the headache. My husband and I are engineers so good with numbers and I’m confident we can at least get the AMT form correct every year (the form she messed up both times, and both times the form that calculated our actual tax liability). Yes, I know… AMT sucks.
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Having received one of those envelopes on behalf of my father, I know how scary it can be. My father must have been 90 at the time. Social Security had made a mistake, which was easily corrected, but the additional problem was one of unreported income because my father, due to dementia, had simply forgotten he’d sold some stock, and I didn’t find any record of it in his papers. He owed the tax from the stock sale, but talking to the auditor and writing a letter helped eliminate the penalties.
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Oh I feel for you. I understand the angst when seeing that you’re being audited. Happened to us in 1992. Husband received notice that his 1983 return was inaccurate. After much research on our part we determined that he did NOT owe the IRS monies and that the CPA that had completed his 1983 taxes was dead and we didn’t have enough paperwork to support our findings. We then we ended up in front of a tax attorney and CPA who connected us with an ex-IRS collections agent that represented people just like us. Long story short: he concluded that without paperwork to prove my husband innocent, it was assumed we owed what the IRS said we did (thousands of dollars)and the payment plan would be $1500/month for the next 15 years – because we didn’t have cash and had to include interest, monthly penalties, etc. My husband filed bankruptcy to avoid the payment.
This particular ex-agent was fabulous, but I personally know agents that are not so great. And they’re the ones that are paid a commission for collecting from citizens. They’re quicker to settle with individuals that have limited assets, but not so quick with businesses and individuals that do have assets.
The best I can do today is to have all paperwork filed and ready, work closely with my accountant to make sure the personal and business taxes are being done, and hope like heck that if we do get audited then between us and the accountant we can come out of it unscathed.
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“I personally know agents that are not so great. And they’re the ones that are paid a commission for collecting from citizens.”
I’m pretty sure that government IRS agents do NOT work on commission.
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I believe she was talking about ex IRS agents who will represent you *against* the IRS, but may not always do the best job.
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“Fortunately, the law isn’t that bad. The statute of limitations limits the time during which an action can be brought by the IRS for a tax audit and the time for IRS tax collection activities. Generally, there is a 3-year statute of limitations for the IRS auditing a tax return and a 10-year statute of limitations for the IRS collecting tax”
How did they come after you 11 years later?
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2008 to 2011 is only within the 3 year statue of limitation unless you read it as 1998. Just helping clarify.
Kenny
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Charlene and her husband were audited in 1992 for a 1983 return. 9 years.
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1983 to 1992 is 9 years.
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IRS debt can be discharged in bankruptcy?
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Yes
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I didn’t know that. I’ve always heard that taxes and student loan debt are the two things that bankruptcy can’t get rid of.
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That’s also what I’ve heard.
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I am neither a lawyer nor an accountant, but my understanding is that tax debts due to unfiled taxes and tax fraud are not dischargeable. But normal taxes owed are dischargeable normally.
That is the gist of the link Sara posted. The linked article says “only in certain circumstances” but those circumstances are the norm (no fraud or other shenanigans), other than that the debt has to be from a few years before the bankruptcy.
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Here’s a link to a basic explanation of the dischargeability of tax debts in bankruptcy. In short, they are dischargeable in certain circumstances:
http://bankruptcy.findlaw.com/bankruptcy/is-bankruptcy-right/bankruptcy-for-debt-elimination.html
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Great reader story. I don’t know much about being audited so it was an interesting read with a really frustrating end! I wish you had the opportunity to fight it. I was a little confused about what they were even going after you for, had you even been abroad and what was the expense?
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I don’t understand the point here either.
It sounds like the entire interaction with the IRS was two letters from them in the mail and a phone call with a very nice and patient examiner. And the reaction was to give up and send a $2000 check that wasn’t owed.
A few years ago I too got an an audit letter from the IRS saying I owed thousands of unpaid taxes. In fact the audit was due to my own error in filing but it turned out I’d simply neglected to file a schedule D that I should have. I sat down and wrote a response and sent them documentation. My next letter from them stated the matter was closed.
Panicing in fear or simply giving up because you can’t bother to spare the time and then sending the IRS $2000 is not the right answer.
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The same thing happened to me about 6-7 years ago. I forgot a schedule D and got a letter from the IRS saying I owed them thousands. I simply sent an explanation along with the documentation. Then I got a letter saying the matter was resolved. I was nervous at the beginning, but I knew I was right, and it all worked out.
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I had a vaguely similar experience. My brokerage issued a corrected 1099-B for a stock sale. The IRS thought they were two different documents and sent me a letter that I owed tax on the proceeds of the second “sale” (and with no basis as they always do). A simple letter in response cleared it up.
I agree with the others – the author must value his time quite highly if he was willing to pay $2000 even when he was in the right.
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My husband and I are small business owners. A couple of years back, we changed our business status from a partnership to an LLC. This means you get a new federal identification number, have to change all your bank accounts, etc. I didn’t realize that it also means you have to file your annual tax return for the closed business entity the next quarter. When we sent in our two tax returns by the usual April 15 deadline, we received a letter fining us for the late tax return on the closed business. A simple letter explaining the situation with our apologies took care of the problem. The IRS waived the fine immediately (we always file and pay in a timely manner-I presume your history has something to do with their decisions). Whenever I have had tax questions of my state or with the IRS, the professionals answering them have been very helpful.
We pay an overall tax rate of about 22% on our gross income each year, and I am not complaining. I appreciate the services that money provides.
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A friend of mine who is semi-retired runs a small hardware store/antque shop. He does a lot of cash business and tradeing/bartering. About five years ago the IRS sent agents to audit him over what was perceived to be about 500 bucks of income. By the time they left they were scratching their heads and mumbling to themselves on how foolish it was to bother this man. The Govt. probably spent four thousand bucks to find 500. The 500 wasnt there and it was a total waste of money and time. Yet the barbarians on Wall Street and in the Fedral Reserve lose BILLIONS and cause TRILLIONS of Dollars in damage and the Govt. gives them BILLIONS in the HOPE that they will play nice and be equitable in the future. Tis truly amazing.
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Suter: I wasn’t cmonaripg the reasons taxes go up and the reasons the price of gasoline goes up. I was only commenting on people’s usual reaction when they do go up.Again, my point is that even if we get the size of government under control, costs are still going to rise, and people need to relax when they have to pay a little more for the things they want from their government.Of course we should all demand accountability for how our tax dollars are being spent. However, we also get what we pay for. Trains, airports, municipal buildings, etc., in this country are, by and large, dirty and poorly maintained — and we seem to be OK with that. If we want to keep paying low taxes (the lowest since WWII), then we’ll continue to have crumbling, sub-standard public works.
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You had representation for IRS Audits, so why did you not approach them first and go to your hourly charging accountant. Maybe you did go there first and they recommended seeking advice from the accountant, but your story did not say that.
Also, it seems like a huge chunk of your business expenses must not have been allowed for you to pay $2000 in taxes. Reverse engineering would tell me that approx $4K to $7K of your expenses must have been denied in this case.
Finally, I totally agree that it is NOT worth fighting esp. if you are earning money today since it can be such a time-waster, but a necessary evil of making money.
Kenny
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Thank you so much for this post– I’m expecting to be audited in the next couple years (I know, sounds weird!) so getting this insight about the process is so helpful. It’s also really nice to see frim the reader comments how many responsible people get audited.
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I live in Canada, but I know we can be audited here, too. I’m always overly conscious of trying to claim the correct amounts, and do the right thing. I can only cringe at the potential consequences if I don’t – it’s all very “big brother”.
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Scary! The IRS seems very mean.
I am in Canada and once the CRA requested some of my rent receipts but it was all very straightforward and not a problem at all. A bit of a hassle to compile them and send them all in but not a big problem. I’m not sure if that’s considered an audit though..
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That’s referred to as a review, and is a very normal course of action in Canada. Each year the CRA chooses which type of expense they will focus on – rent, child care, moving expense, and they do a random call-out to taxpayers. If you couldn’t comply by providing appropriate documentation, your expense would be disallowed, and tax would be due. Some deductions attract more attention, as they also analyze “norms”. Anything falling outside the norm gets you unwanted attention. An audit is a much more serious event. But speaking from personal experience, anytime you come home to an unexpected envelope from the CRA, the heart pumps just a bit quicker, and you steel yourself for something unpleasant.
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I don’t get the anger in this post. You got audited. And?
Irritation, I understand, because it takes time. But you’re angry as though you are too special to be audited. I don’t get that.
And you didn’t have time to fight $2,000 owed? Really? I think I could carve out some time for that.
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I also don’t get the anger. You had to get your documents together but it sounds like it ultimately came down to a misinterpretation of tax code.
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Audits are terrible! I had 2 audits about 30 years ago. They were routine audits, but like your reader you spend hours to prepare for it. I changed CPAs and have not had another audit.
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I never dealt with the IRS before their 1998 reform, but all my interactions with them in the past decade have been very good– they are friendly, professional and very helpful.
I’ve been on payment plans for back taxes, I was allowed to suspend the payments while I was going through hard times, and I’ve had money returned to me I didn’t know I was owed.
Yes, paying taxes is no fun, but I think the IRS gets a lot of undeserved hate.
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I agree, I think they take a lot of heat for basically doing their jobs. The alternative is they apply the rules loosely and let people get away with lying on their returns, leaving the rest of us to pick up the tab. No thanks.
While I’ve never been personally audited, I’ve had several instances with my employer where I had to contact them because a mistake was made, or something wasn’t filed properly on our end. The key is communication. If you made an honest mistake, and are nice and up front about it, 9 times out of 10 they let it go or significantly reduce the penalty. The people I know who run into trouble are the ones who don’t respond to their inquiries, or try to argue when it’s obvious they made a mistake.
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I’m from Scotland but now live in the U.S.
There’s seems to be a great fear of an audit and I don’t understand why? (I’m not belittling anyone’s reaction. I’ve never had one.)
Do they tell you the specific reason for the audit and is it not therefore relatively easy to correct if you have good records?
During my transition from the UK to the US I had invested in stock in both countries, and eventually transferred it all to the US. A few years after that the IRS sent me a demand for $900 and illustrated why I had to pay. I sent a check with a letter explaining why I thought they were wrong. They then refunded the payment.
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Alan, you said : “There’s seems to be a great fear of an audit and I don’t understand why?”
El Nerdo mentioned a reform in 1998. The IRS used to be a lot worse. There were a lot of major changes in that reform that made it better. For example, before the reform the burden of proof was on the tax payer not the IRS. Which is contrary to normal US rule of ‘innocent until proven guilty’. THeres a long history of horror stories, negative stereotypes about IRS audits. Reform has made them a lot better, but public perception hasn’t changed.
I think that peoples perception and fear of the IRS is based a lot on how they used to be before the reform.
Plus of course the IRS represents ‘the tax man’ and people just don’t like paying taxes and they especially don’t like getting surprise audits that say they have to pay a whole lot more taxes and fines and interest.
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In addition to what jim said, providing all the documentation from years earlier can be a huge headache. I used to work for a research department of a bank, and I received the requests for old statements and check copies from our customers who were being audited. It sounds like a nightmare. As a financial institution, we were only required to keep records for 7 years. So, if you didn’t keep your bank statements and check copies from 9 years ago, you’re SOL if you get audited, we can’t provide those to you. Even for recent ones, we charged $1.50 per statement copy, $1.00 per check copy, and $10.00 an hour for any more specific research that was requested. I have billed people hundreds of dollars for all the documentation they could have saved but didn’t (and really, who saves all that?). If you had multiple banks from which you needed this information, you could be paying more for the proof than the IRS is requesting.
Plus, the IRS can send you to jail if you don’t comply. Its not unlike receiving a letter from the Police asking you to *prove* you didn’t commit a crime. Just the idea is anxiety-provoking.
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If only the SEC was as diligent at ferreting out any possible inconsistencies in the activities of big corporations, we’d be in a lot less economic trouble today. So sorry to hear about your audit experience – as a self employed business owner, I always cross my fingers that this won’t happen to me. My uncle was an accountant for many years and had some legendary battles with the IRS (he won every time, but the next year they would come back with exactly the same accusations).
Here’s hoping that will be your only audit. I’m sure one is enough to last a lifetime!
Daisy
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I dunno. I sympathize with the audit, but the way you tell the story it seems like you just didn’t feel like dealing with it. Now, that’s valid, but a far cry from “the law won.”
I have every single one of my tax records and supporting evidence from all the claims I’ve made (of course, it’s not a huge number because I’ve only been working since high school, but still).
To me, $2000 is worth writing letters and substantiating my claims to that money. If I don’t owe $2000, then I’m not going to pay it.
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My wife’s employer did not report some stock option sales correctly. This resulted in the IRS thinking we owed them $15K. We found an accountant who filed the correct amended return for about $400. We got the letter saying that we were all set and didn’t owe anything additional shortly afterwards.
Since then we just pay a CPA to do our return. Between my income, mortgage deduction, my wife’s business income and other deductions, I don’t have the time or energy to keep up with it. It costs under $500 to have our return done, and it’s so worth it.
The reason I don’t care? I handle most of the automotive maintenance, household repairs, home improvements and other things people might hire out for. I’d much rather spend 4 hours doing a 30K service (and saving $4-500 in the process) than doing taxes.
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I want to super duper like this comment. There is one thing I will not do myself – taxes. I used to be stuborn and insists that I could do it better, wasn’t worht the money etc.. – all artifacts from my parents way of thinking. Now, I still spend hours each year collecting the data, summarizing the changes from the previous year and reviewing the completed return. I want to understand my tax liability. BUT there is a huge weight tha thas been lifted since I started paying someone else to actually do the final paperwork. I know if I were audited that I have good complte records, that two people (myself and my tax person) have reviewed them. Since i pay someone who charges by the hour – all that time spent colelcting the data saves me money, but I still get the protection of having a professional complete my taxes.
Unlike Mr 1% I do think it is an unfortunate tax on the less wealthy that the tax code is so complex that peace of mind can only be had with a tax professional. The amount I pay to have my return done is more expensive because of my income and mortgages etc.. but it’s still not proportional to one someone making significantly less would pay for a simple return.
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It’s a good lesson in picking your battles carefully. It ticks me off that the IRS can’t even answer tax questions from citizens the same way let alone apply the laws consistently. Don’t get me started!!
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I also dont understand the point of this story. It would take alot to get me to give up fighting for $2000 IF I thought I was right. Heck, Id fight for years for $1 just out of principle.
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I think that is what he decided–that fighting for the 2K wasn’t worth anymore of his time and energy and stress.
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Being a 1 Percenter, this has got to be my worst nightmare. Not that I do anything illegal, but the amount of assets, deductions, and other things would be an administrative nightmare.
I haven’t been audited yet, but it seems this administration is out to get us millionaires.
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I don’t so much see it as “out to get” millionaires in a personal way, but as a purely economic decision it makes sense for the IRS to expend audit dollars and manpower on high earners. “Catching” a 1% mistake on a $15 million salary yields a much higher return than a 1% mistake on someone making $15,000. While high-income returns are more complex to audit, I’m sure the incremental auditing expenses are relatively minor compared to the incremental potential “payoff.”
I’m not saying it’s necessarily fair or right, and I’m sure there are many possible examples to counter this logic, but in general I just see it as good business sense for the IRS to invest its (finite) audit resources where they’re most likely to yield better returns.
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I had a similar situation several years ago when I received a discrepancy letter (not an audit). They indicated that some investment income was categorized and as a result I owed a small amount of additional tax (around $700 if I remember properly). I truly feel I was correct and they were wrong, but I paid the $700. Just didn’t have the time to fight it, and in the back of my head my paranoia told me that fighting it could make it worse…
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Hmm…it seems that maybe there are quite a few IRS workers on here-LOL.
I would have fought tooth and nail to even get back $1 that the government owed me. The product of my hard does NOT belong to the government…they do NOT merely decide how much I get to keep. The whole concept of an income tax is morally revolting to anyone that values freedom and liberty. Yes….taxes do need to be raised for the VERY limited duties of the federal government..but there are fairer ways to do it than an income tax…like the Fair Tax (a nationwide sales tax). EVERYONE should pay for the privilege of living in this country…NOT just 53% of us. It would abolish the need for the IRS saving us who knows how much money.
It would also abolish audits:-)
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The tax folks audited me when I’d just had a baby. I explained and they gave me two extra weeks. Gee, thanks.
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I hate the IRS (local equivalent). I had educational costs back in 2006 (yes, 6 years ago) and got a reduction on taxes based on that. After 2 years I got a letter saying ‘something’. I called the number and asked them to explain what the letter meant. They couldn’t. I was going to be called back. I wasn’t. I called again, but no avail, so still no clue if I was GETTING 5k or PAYING 5k. (quite a difference!).
I filed a complaint, not against the decision, but against the letter being unreadable. No response. But then again, no invoice either. Then 3 years later (ie. 5 years after I filed my taxes I got a letter saying “here, pay this, and include interest”. I paid (otherwise there’d be fines as well) and I filed a complaint again, and got a message they received my letter after 2 months. 6 weeks after i got another letter that they’ve given themselves an extention of another 6 weeks, but oh, could I please deliver these 10 forms, and signed copies of everything related to the case within 1 week? That includes forms signed by my boss of 6 years ago, the company doesn’t even exist anymore.
*fuming*
I got that letter yesterday. So I have another 5 days to find everyone I ever got any money from 6 years ago. They suck.
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I actually had something similar to this happen to me. DH and I had filed and extension with my name listed first, but filed our taxes with his name listed first. Apparently that is confusing to the IRS’s computers, so they hit us with a failure to file penalty. We called and got it resolved, but one of the letters we got around that time made no sense. I read and re-read it and couldn’t make heads or tails of what it was saying. I’m a college-educated software developer for a financial institution. I’m not illiterate, and I see legalese all day long. Still, I had no CLUE what this letter was asking. Was it saying I owed money still? There wasn’t an amount listed. Or, was it telling me the matter was resolved? It didn’t appear to say that either. Couldn’t say. I just ignored it.
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I used to do our taxes…then we got audited. Our IRS agent was NOT nice or co-operative in anyway. For 4 months (and two weeks of vacation used up) it was a nightmare. A supposed 16K was at stake. We hired a CPA to help us fight it. Turned out that the IRS could not find one single problem with the return but that did not stop this IRS agent from threatening, belittling, and making life hell. While I am confident that we could still file our own taxes correctly, the peace of mind in paying a CPA to do it in the event that it should happen again is absolutely 1000% worth it. He is worth every penny we pay.
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I agree. I always have a cpa do our taxes. I look at it like an insurance payment — well worth the expense when you need it. I don’t understand the IRS forms, and I am very good at forms, so it makes sense to have an expert do them.
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The author of the post had an accountant and still got audited. And somehow the accountant was so expensive, that it would have cost more than $2000 to hire him.
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No, he consulted with an accountant about the auditing of a return that he completed himself with TurboTax.
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This is not well edited. The editor has yet to correct the silly “statue of limitations” issue mentioned in comment #4. But more importantly, I think the story isn’t well laid out.
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The LAST thing a taxpayer should ever do is to go to an audit alone and unrepresented. There are limitation about what the IRS can and cannot ask, but most individuals have no idea about that information. Also, there is a wide variance in the knowledge and experience of auditors. I have seen some who can’t understand the complexities of accounting used in a business, yet they “toe the company line” in holding to the notice that says more tax is due.
If you would like to check out how you can receive help for an audit … any many other “life events”, here is a website with more info. I am not posting any details here because I don’t feel that is appropriate, but am including a link so that those who want more info have access to it.
http://bit.ly/qglvVj
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I was audited about 3 years ago; the IRS said I owed about $1500 for 1099 income I didn’t report. When I looked over the paperwork, I knew they were right. No battling necessary — they caught me. The fact was, I didn’t report that income because it was a transitional part of my life and I needed the extra money then… a couple years later I was fine and could pay the tax bill. It was a bummer, sure, but I didn’t get indignant about it. I wrote the check and got on with my life.
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I was lucky that the one time the IRS tried to come after me for back taxes & penalties, it was solved by a single “Dear Idiots” letter from my dad’s lawyer friend. I certainly did not appreciate coming home on my birthday to a letter saying I owed the IRS some $12,500!!
I had inherited some money from my grandmother’s estate which was put into a trust fund for me. Whatever estate taxes applied were paid at the time, and I included the interest earned in my income taxes every year after. After I turned 21 the trust fund was converted to a different thing (I forget now what it was called) but I kept paying the appropriate taxes. Then I cashed it out for my condo downpayment. And three years after that, some nitwit at the trust company decided that he/she should report the entire value of that fund to the IRS as income, as if it had materialized out of nowhere the day I cashed out.
Lucky for me, that one letter (addressed as “Dear People” but actually meaning “Dear Idiots”) not only took care of the $12,500 that the IRS thought I owed them, when Dad’s lawyer friend looked over my tax return for the year in question, he found some deduction I’d missed, so I ended up getting a couple hundred dollars back instead. Moral of the story? Make friends with a lawyer, even if it means babysitting his obnoxious children!
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I have to admit I’m scratching my head on the purpose of this post. What’s the take-away?
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Hi everyone,
Thanks for all the comments. Sorry if it was a bit confusing. Two things to try to clarify — I was angry because the reason the IRS said they were auditing me was that I had foreign income from an internship which was completely not the case and it would be really hard to imagine that it would be. The reason that I paid in the end was because the relevant tax code around the expense the IRS rejected is not exactly black and white and just responding to the initial information request took so much time, I did not feel it would be worth the effort to continue to debate the point through an in-person meeting, or more calls with the IRS and I did not want to pay my accountant thousands of dollars to represent me. As to what the point of the story is, it’s more just sharing what I went through. I had no idea what an audit was like before it happened to me, so I thought I would share the experience.
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that sounds so stressful! The IRS has bigger fish to fry, sheesh.
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So, has anyone here ever used the TurboTax Audit Defense? Do they assign an Enrolled Agent to respond to the IRS on your behalf, or, do they try to explain to you that since you only spent $39.95 for the “defense”, that you should hire an Enrolled Agent (and that advice is what you paid $39.95 for)? I’m just trying to decide whether it’s worth $39.95…
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Odds are, it’s vaguely like an extended warranty. Almost never worth it unless you have reason to believe you are more likely to use it than the average person.
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Seems like there are no checks and balances when it comes to the IRS. They seem to like coming after the little guy who struggles from paycheck-to-paycheck just to survive. The IRS knows that we can’t afford to fight in court and we have no one to protect us. Yes, they are polite on the phone when you try to explain the issues but they send you many forms and give you many instructions that only a lawyer can understand(again, I can’t afford a lawyer). So my only option is to pay what they ask for before the stress kills me. I don’t know who’s worse, the IRS or the mob!
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At least you can report the mob to the police.
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I think you made the right choice. It would be nice if we all could stand up and be the hero but like you said, we rarely have the time and energy to do that.
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