I was audited by the IRS! (and the red flags to avoid an IRS audit)

I was audited by the IRS! (and the red flags to avoid an IRS audit)

IRS audit

When I was young, my father got audited by the IRS. I can't remember the details — I was young, and my father died long ago — but I do remember how he fumed and fussed for weeks as he tried to gather the paperwork and make his case to the auditor. The IRS audit experience made an impression on me. I vowed that when I got older, I wouldn't be as messy and disorganized as he'd been, and that I'd always do a good job of documenting my taxes.

For the most part, I've stuck to that. I've tried to save every scrap of paper related to my personal finances and, especially, my business finances. I've always tried to be meticulous about respecting the wall between business and personal accounts. And since I started this blog eight years ago, I've tried to pay attention to the red flags that lead to IRS audits (which is one reason I've never attempted to deduct a home office expense, even though there are times — like now — when I could).

My decades of being a pack rat paid off recently. In early April, I got a letter from the IRS. The government wanted to audit my 2011 taxes, and they were particularly interested in my Schedule C (“Profit or Loss from Business”).

“No worries,” I thought. “That's why I saved those documents all these years!” Turns out my archiving techniques left something to be desired.

The Documentation

Because 2011 was the last full year we were married, my first step was to contact Kris. “Do we have anything to worry about?” she asked.

“I don't think so,” I said. “We never did anything wrong. At least not intentionally. We might have made some mistakes somewhere, but I doubt there's anything major. You just pull together your paperwork, and I'll pull together mine.”

Kris had gathered all of her info within a week, but I was completely consumed with preparing the Get Rich Slowly course. It wasn't until the end of April that I began to gather my statements and receipts and the other information the IRS had requested.

I found most of the paperwork stuffed in a shoebox (literally!) in the back of my storage unit. Because there was zero organization, I spent an entire Saturday afternoon stacking statements and receipts in chronological order. “I guess that's my first lesson,” I thought. “I ought to be more systematic about how I archive my financial records.”

After sorting the physical documents, I went online to retrieve digital statements. I was frustrated to find that many banks and credit card companies don't allow users to access digital documents after a year or two. After a certain time elapses, you have to file a request to have the documents mailed to you — and that can take days or weeks. (It took over a month to receive one statement I requested!)

I was able to gather almost everything I needed. I hoped that the auditor wouldn't worry about the few small gaps.

Note: Ultimately, I did have to fill in the gaps. I requested duplicate statements directly from the banks. But the real godsend during this process were Quicken and Quickbooks. During 2011, I kept complete business and personal records. The auditor was able to use these to track the flow of money from account to account.

The Interview

On a drizzly morning in early May, I drove to my accountant's office for the audit interview. “You don't seem too stressed,” Sabino said.

“You know, I'm not,” I said. “I haven't done anything wrong, at least not that I know of. So, this seems like more of an adventure than anything. Maybe I can write about it for the blog!”

Sabino looked through my paperwork. “You won't need these,” he said, setting aside some extra financial statements I'd printed. “As a rule, you only want to provide the info that the IRS requests. You may think you're being helpful, but every extra piece of information gives them another chance to expand the audit.”

“What do you mean?” I asked.

“Well, the IRS won't go digging for dirt on other years. But if you accidentally give them reason to suspect there might be something to find in 2010 or 2012, then they can expand the audit beyond 2011. So, we never give them more than what they ask for.”

“Okay,” I said.

“That same thing is true during the interview. You can be friendly, and you should answer the questions fully and truthfully. But don't be chatty. Don't volunteer stuff. Even a casual conversation can give the auditor reason to expand the examination.”

We gathered the paperwork and headed to the meeting room. The auditor already had stacks of documents regarding our case.

“Wow!” I said. “You're not messing around.”

The auditor laughed. “You know the government,” she said. “We love our paperwork!”

She started the interview by reading questions from a pre-prepared script. “Have you reported all of your income?” “Do you keep business and personal accounts separate?” And so on.

Eventually the questions moved off-script as the auditor tried to get a handle on my business. “You make money blogging? How does that work?” “This conference in Denver was with other bloggers? Did that lead to more business?”

After 20 or 30 minutes, we were finished. “I think I have all I need,” the auditor said. “I'll get this wrapped up and then let you know my decision.”

Related >> How to Audit Your Own Investments

The Outcome

I expected a decision on my audit within just a day or two, but that didn't happen. Instead, the auditor continued to request information and clarification. Why did my checking accounts showed more money deposited than my W2s? What was this World Domination Summit thing?

As the weeks passed, we discovered I had made a few errors. I paid for certain business expenses out of my personal account, a mistake that actually hurts me. Plus, I'd made a personal loan but hadn't been recording the interest income on my taxes. But it seemed to me that the mistakes against me were balanced by the errors in my favor.

The auditor must have agreed because today I finally received word: The audit will come back “no change,” meaning I won't owe anything extra (other than the $1,500 I paid my accountant to coach me through the process!). The auditor did ask my account to scold me, though: “Please remind John that he needs to document the business purpose for an expense and make sure that the expense makes sense for his blogging business.” That's a change I've already made to the way I track my expenses!

Here are some of the key things I learned during this process:

  • Don't file a tax return during an audit. If you do, the audit could expand to include the new information. In my case, I received notice of the audit in early April, just before filing my 2013 return. My accountant immediately applied for an extension.
  • Get organized. As soon as you receive the audit notice, gather the requested information. Don't wait. Even if you're organized, this will take time. If you're like me, you'll discover some pieces are missing. It can take weeks to receive duplicate statements from your bank or broker, so start right away.
  • Get help. Hire a tax professional to represent you. He'll have a much better understanding of tax law and the audit process, and can coach you on what to say and do.
  • Be courteous. You may hate the IRS and resent the audit process, but don't take it out on the auditor. She's just doing her job. Be polite and professional. Imagine that you're at a job interview and act accordingly.
  • Change your habits. It's easier to be organized now than to create it from scratch under duress. After my audit, I adopted a new, embarrassingly simple step: I labeled a file folder “2014 Taxes” and I've been placing all the year's financial documents here. I even print electronic documents too, since I learned the hard way that many financial institutions only keep statements online for a few months.

I'm glad that my audit story has a happy ending. Many don't. If you're concerned about being audited, let's look at common aduit flags so you can avoid them.

Red Flags that Lead to IRS Audits

First, it is helpful to know what an audit flag is. Most tax returns are processed by IRS computers. The computers are programmed to watch for anything out of the ordinary, anything that strays too far from statistical norms. An item that falls outside the norm may be “flagged,” increasing the likelihood that a return will be audited. A flagged return will be manually reviewed by an IRS employee to determine if there actually is a need for an audit. Audit flags don't guarantee you will be audited, but they do mean that the IRS will probably take a closer look at your return.

Personal Taxes

Here are 10 of the most common ways to bring your personal return to the attention of the Internal Revenue Service:

  • Incomplete or sloppy returns — Math errors and missing information prompt scrutiny, as you would expect. If the IRS computer can't make sense of what you've filed, a human has to check to find the mistake. This is one reason to file electronically: Computers help to catch bonehead errors.
  • Unreported income — This is a no-brainer. If you file a return but fail to report income received, you are heading for trouble. All of your interest, dividends, and miscellaneous income must be reported. Remember: Everyone who sends you a 1099 is also sending one to the IRS.
  • Suspiciously low income — If you are making much less than others in the same profession, that raises a flag.
  • Having a high income — Though fewer than 1 percent of taxpayers are audited each year, those making over $100,000 are five times more likely to come under scrutiny. “Higher income earners are more likely to be audited because there is more tax money at stake,” says Eric Tyson, an author of several Taxes for Dummies books. “The IRS is a business, they have employees and they do not have time to let them audit people if they are only going to earn $2 worth of tax.”
  • Drastic changes in income — Unexplained fluctuations in income can indicate that something was under-reported somewhere. Most people don't have income that swings wildly up and down, and the IRS knows it.
  • Round numbers — It is unlikely that your investment returns were exactly $500, or that your mortgage-interest deduction was $10,000. Too many round numbers on a return are a symptom that something fishy may be going on.
  • Too many charitable contributions — Charity is good, but too much charity can raise a red flag. If the average person in your income bracket donates about $1,000 to charity and you claim you donated $5,000, you are going to increase the odds of an audit. Be sure to save your receipts!
  • Participating in tax scams — The IRS is trained to deal with common evasion attempts and tax scams.
  • High itemized deductions — Again, anything too far from the averages is likely to bring your return to the attention of the IRS. There is nothing wrong with claiming all of the deductions to which you are entitled; but be aware that if you have a lot of itemizations, you are more likely to be audited.
  • Disagreements between state and federal returns — This is another example of how sloppiness can hurt you. Be sure that your information matches on both your state and federal returns.

Small Business Taxes

Having a small business is itself a flag of sorts. Some people use small businesses as a tax dodge, a way to write off expenses, and so the IRS keeps a close eye on small-business owners.

  • Being self-employed — Filing a Schedule C isn't a guarantee that you will be audited. But, as my accountant told me the other day, the IRS doesn't like to see “a small Schedule C that you continue to show losses on while you have a regular job.” For more information, check out this IRS page: Is your hobby a for-profit endeavor?
  • Home offices — There have been several articles on major sites recently touting the tax advantages of a home office, but you've got to be careful. This is a huge red flag. For more information, here are some home-office-deduction reminders from the IRS web site.
  • Family members on the payroll — One common tax dodge is to “hire” a family member in order to take more money out of a business. There's nothing wrong with employing family members as long as they are actually working.
  • Unlikely business deductions — It can be tempting for small-business owners to claim new toys as business deductions. That Nintendo Wii? Not a business expense unless you are reviewing games with the intention to make a profit. That trip to New York? Not a business expense unless it serves a legitimate purpose. Don't try to play it cute.
  • Excessive entertainment deductions — This is one that has me worried. I've only just recently begun to take people out to lunch with my business card. I am careful to only use this card if we are actually discussing something related to writing or blogging, but even so I wonder if I ought not just pay out of personal funds.

Audit flags do not necessarily lead to actual audits. They don't even mean there is something wrong with the return. They simply indicate that a tax return is more likely to be checked by an actual human being and, therefore, be more likely to get audited than another return. (And remember: The IRS always selects a certain number of people to audit completely at random.)

Most of these red flags aren't an issue for the average wage-earner who is filing an honest return. Some — like the home-office deduction — may trigger an audit even if legitimate. But if you've played fair with the government, you don't need to worry. The New York State Society of CPAs writes:

Don't hesitate to take deductions you can substantiate. CPAs emphasize that these precautions should not suggest that taxpayers avoid claiming legitimate deductions. On the contrary, you should take every deduction you are legally entitled to take, as long as you retain supporting documentation.

The best defense against an audit is to be honest. Report all of your income. Don't try to fudge things. Use tax preparation software or an accountant if you are nervous about getting things right. But even if you have a professional prepare your return, check it for obvious errors. Be sure the numbers make sense. Save your receipts.

Have you ever been audited? (Or do you know somebody who has?) What was the experience like? How difficult was it for you to pull together the requested documentation? Any advice you'd give others so that they can better cope with an audit in the future? (Or to avoid one altogether?)

More about...Taxes

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Dusty
Dusty
13 years ago

Great writeup! Nothing like adding a little extra paranoia to the tax season, which isn’t necessarily a bad thing if it saves you from an audit.

brad
brad
13 years ago

I’ll vouch for the home office red flag. I don’t even bother trying to deduct my home office anymore because it triggered an audit once. The audit was such a time-consuming hassle that the few dollars I could save in taxes simply aren’t worth the risk.

Allie
Allie
13 years ago

Do they mean a home office in which people actually do not work? My husband and I both actually do work from home, and we do ALL our work from home.

brad
brad
13 years ago

No, I work from home and do nearly 100% of my work from home apart from two or three short business trips a year. Deducting my home office expenses (primilary a pro-rated share of my rent and utilities) triggered an audit a few years ago and I’ve never bothered to deduct them again. But my office is small (about 20 square feet, little more than a cubicle) and I wouldn’t gain much by taking the deduction anyway.

Fai Mao
Fai Mao
13 years ago

Try getting audited if you live over seas!

I have a non-US citizen wife and our US taxes are a bear.

Mike
Mike
11 years ago

Personally, I don’t think the Goverment has ANY right to be so one sided, we give them too much power.

If we fail to report some income, we get fined with interest and/or thrown in jail. I’d LOVE to see the same rules apply to them when they throw our money around their pork projects.

SavvyChristine
SavvyChristine
11 years ago

This is a great post to have handy during the tax season. I just did my taxes the other night, and I started to wonder about who gets audited. Thanks.

redragon
redragon
11 years ago

The is it a small business or hobby link is dead

julie
julie
11 years ago

I am in the middle of an “interview” aka: audit. The home office triggered it. A rapist and murderer has more due process in this country, than a medical professional in a critical need area, attempting to provide quality care to our aging population. I thought I could do this without an attorney, but the agent is so bent on finding something. Now I have to go back by an additional two years. He won’t stop until he can, in my view, destroy me. I am giving up; this is the most stressful situation that I have ever experienced in… Read more »

Lemastre
Lemastre
7 years ago
Reply to  julie

Julie, I hope you’ve sorted out your IRS problem by now, but it was difficult to fully appreciate your plight because your message of March 2009 didn’t make clear your situation or what exact problem the IRS detected in your return. Are you a physician? Are you a naturalized citizen? Are you an ex-GI? You refer to such folks, but somewhat obliquely, so I’m not sure which if any of them is you. I do gather that you are physically incapacitated in some way, so maybe you were injured in combat. Also, mere “computational errors” should not bring about what… Read more »

Eileen Garcia
Eileen Garcia
11 years ago

Is there a red flag incurred for tax returns that have an extension filed?

Kenny
Kenny
11 years ago

If you’re audited the agent has to find something to penalize you for to justify they’re time. The IRS is not going to pay someone to audit you and not make any money. So they will come up with something whether it’s there or not.

K.V.
K.V.
10 years ago

I don’t believe “round numbers” are an audit flag for anymore since the IRS clearly stated in, for example, the 2009 Instructions for Form 1040-EZ that “You can round off cents to whole dollars on your return. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.” My sister is a CPA and auditor, and she rounds off, so I do as well.

J.M.
J.M.
8 years ago
Reply to  K.V.

I think they mean the total number. For instance, your salary isn’t normally a round number ($35,000) most times it is like ($35,501) or something like that. Or for deductions you don’t normally have something like $100. It may be like $107 or $132 etc. I think that is what they were referring to. I do the same thing as far as the rounding dollars and cents.

Lexy
Lexy
10 years ago

I realize my comment here is three years late, but I thought this might be useful to someone looking at this. I actually know a handful of revenue agents, although they audit businesses and not individuals. Here’s the thing: They want you to be in compliance. They do not go looking for errors that aren’t there or trying to ding you for the tiniest thing. If you are honest (even if you’re honestly clueless) they will try to help you. One person I know recently spent several dozen hours helping a taxpayer sort through his boxes full of receipts/napkins/random notes… Read more »

James
James
9 years ago

“My sister is a CPA and auditor, and she rounds off, so I do as well.”

This isn’t talking about rounding to the nearest whole dollar amount. If you actually read the article, the author says ROUND NUMBERS like $10,000.00 and $500.00 can be a flag.

Round numbers in the hundreds or thousands are an entirely different concept than rounding $13,246.83 to $13,247.00.

Carlos
Carlos
9 years ago

Great post! I’m a professional musician who’s felt the financial pinch the last couple of years. So, my earnings have been lower the last couple of years as well… Being in the entertainment business for over 20 years, I’ve always worried about being audited. But I’ve always claimed conservative tax deductions, etc. What got me last year was an investment in which my statements have been showing a declining balance, thus I thought it was a loss, but the investment firm claimed a profit and we forgot to claim that, thus the IRS sort of did a semi-audit on us… Read more »

Richard
Richard
8 years ago

I’m getting audited for my 2008 returns. 2 days are set aside in January 2012 for the audit, and many hours/days of stress leading up to that time. I was told that my home office was the red flag that triggered the audit. It’s difficult to keep a positive attitude when I feel I’m a pretty damned honest person when it comes to paying my taxes. But alas, I go through PCI (Payment Card Industry) audits every single year as part of my job. I’m going to try and keep a positive attitude and treat this is just part of… Read more »

Marie
Marie
8 years ago

A small business and personal audit that began in Nov 2011 is an ongoing nightmare. Business is in a downward mode due to economic factors. ALL documentation has been provided to the IRS but the audit is still open. What does it take to get a clean audit closed?

BEWARE: IRS adds deposits to checking and savings for the year and “ASSUMES” all is income … no comprehension of online transfers between checking and savings … no comprehension of overdraft protection … and product rebates are not income … this has been most stressful, time-consuming, and cost me a fortune.

Andrea Coutu
Andrea Coutu
8 years ago

I got audited once. It was the week I had a baby. The tax folks very kindly allowed me to have an extra two weeks when I explained I had got out of the hospital just a day or two before. Um, thanks, tax folks.

Tom
Tom
8 years ago

Our accountant pays our fed and state taxes quarterly based on the previous years taxes, not our current years sales. This past year wasn’t quite as good as the previous years and the result is we have a supplus of 25000.00 which is being rolled over into this years taxes. My question is will this lead to an audit being we over paid by 25k?

Jamie
Jamie
8 years ago

I just got a letter from Nazi headquarters (IRS) sayin there’s a conflict in my taxes between state & gov. I got married Oct ’08, changed name via Social Security a week after wedding & filed married, but my W2s were in my maiden name. Subsequent taxes were filed using my married name, no problem. Now almost FOUR years later I’m getting flagged by IRS? Please!

LD @ Personal Finance Insider
LD @ Personal Finance Insider
7 years ago

It is good to be aware of what will trigger an IRS audit. Nobody wants to deal with that. However, if you do your taxes properly, an IRS audit shouldn’t be too scary.

Lakeshia Wodskow
Lakeshia Wodskow
7 years ago

The best way to avoid an IRS audit is to simply make sure your taxes are done correctly each year based off the information contained in your IRS file.

Jacquelynn Pressly
Jacquelynn Pressly
7 years ago

I have noticed that of all different types of insurance, medical insurance is the most controversial because of the discord between the insurance cover company’s obligation to remain making money and the customer’s need to have insurance policy. Insurance companies’ commissions on overall health plans are incredibly low, thus some companies struggle to profit. Thanks for the suggestions you share through your blog.

Roger
Roger
7 years ago

Oh my god the amount of whining in the comments. I think we all know the little games self employed people play with their income. “Put a business sticker on your car and call it a work car!” Or, “I read my email in the restaurant crapper. I guess we’ll call this a work lunch!”

And you wonder why people get audited.

matt
matt
6 years ago

I will speak the the charitable contribution aspect. We got audited based on that. It was super simple and we just handed them a stack of cancelled checks and the donation letters. The person interviewing us was wonderful and polite but still an audit

Annie
Annie
6 years ago

I get audited every year, I make under $40,000, and I did my taxes online using H&R Block. H&R block made a mistake one year with state taxes, of which they do not guarantee that they will take care of any payments, I had to pay $765. The only thing H&R Block will pay is interest, and you won’t want to build interest on anything you owe the IRS. H&R Block had some kind of computer glitch that affected a lot of people and ever since then I have been audited and have had issues every year. This year I… Read more »

Ellie
Ellie
6 years ago

Why don’t they just take our paycheck and give us the 10% left over after we get thoughroughly cleaned out,they can save us from all the paperwork and rediculously complicated tax code.

Seth at Ectopistes
Seth at Ectopistes
6 years ago

Glad to hear it went well overall.

I have a buddy that is one of the funniest, least uptight people I’ve ever met – I was shocked to find out he does audits for the IRS. His advice is simple; don’t try to lie further if you’re caught, and don’t be a jerk about it. In general, even if you’re knowingly guilty about some things they’ll let you off without much more than you owe unless you give them reason to make an example of you.

FI Pilgrim
FI Pilgrim
6 years ago

Great advice, thanks for sharing JD. I do have a file for each year’s tax documents, but as a sole proprietor I haven’t thought too much about keeping good documentation on business vs. personal expenses.

Glad it went well for you!

Kate
Kate
6 years ago

I was audited when I was in college- way back before you could file online. Apparently someone thought my 4 looked like a 9 and wanted to know where the other $5k came from. Dumbest waste of time I’ve ever gone through.

Tim
Tim
6 years ago

Hello,

Can you expand on the mistake of paying for business expenses out of your personal account, and why that ‘hurt you’.

Understand that you shouldn’t do this, but as a small business owner, I’m often paid to my name (instead of business) and it’s a lot of effort sometimes, so I deposit in personal, transfer to business.

Also, I often pay for items , actually a lot of items with a personal credit card and then just mark the business expenses.

It seems like this could lead to significant issues?

mary w
mary w
6 years ago
Reply to  Tim

Tim – I’d guess that because JD paid out of his personal account that he didn’t notice them when he filed his taxes, hence the missed deduction.

Andrew
Andrew
6 years ago

If you have a legitimiate home office, and can back that up with documentation, there is no reason not to claim it. I did so for 14 straight years and never worried about it.

Julie
Julie
6 years ago
Reply to  Andrew

Your audit experience will largely be dependent on your auditor. I have been through several audits on behalf of my company (a corporation) and I will tell you first hand that an IRS auditor can disallow a deduction that should have been allowed. They disallowed 3 years worth of very large legal bills which resulted in our company owing more $300,000 in taxes because of a personal bias of the auditor and her lack of experience in the corporate world. We also found that the IRS bureaucracy is very hesitant to correct/curtail one of their own. Several attorneys told us… Read more »

Amigo!
Amigo!
6 years ago

The dog at my records…….

Sherry
Sherry
6 years ago

I’m an accountant and learned this from an IRS auditor who coached me:
I’ve been using DayTimers (yes, paper) for years and they come in cool little plastic boxes the size of a recipe box with dividers. Jot down mileage, dollar amounts spent, etc on the day you travel/spend, etc and this “informal log” counts as documentation for audit purposes.

Kirsten
Kirsten
6 years ago

I have never been audited (knock on wood), but that and identity theft are some of my worst nightmares. Very interesting to not file a tax return during the process. I probably wouldn’t have known that!

Kris
Kris
6 years ago

We were audited the year that I had a Fulbright award. Actually at the Fulbright orientation we were told that there would be a good chance of getting audited (apparently that’s one of the red flags). Our tax preparer didn’t do much to help us, and there was a lot of confusion on my part about how the taxes had been put together while I was away (my husband didn’t join me in Bangladesh). We did keep good records and had physical copies of everything, including email exchanges with the preparer that explained the process (to us then, and to… Read more »

Brendan
Brendan
6 years ago

I use an online service (I think it’s called FileThis) that automatically downloads PDFs of my financial statements each month. You can set it to put them in a folder on your computer or in Evernote, Dropbox, etc. it happens automatically so I don’t have to think about it. I set it up a few years ago when I came to the same realization that getting statements more than a year or two old is a huge pain.

Zee @ Work-To-Not-Work
Zee @ Work-To-Not-Work
6 years ago

I work in an industry that gets audited quiet frequently (multiple times a year) it’s not a tax audit, it’s more of a process audit but the auditor’s goal is the same. To verify compliance. Your accountant’s advice is spot on, don’t talk to much, don’t offer “extra” information to expand the audit. One thing they should have mentioned was that auditor’s will sometimes ask obtuse questions for you to explain. This is usually intentional and they are trained to do this to hopefully get you to explain more than you need to. It’s another tactic they have to get… Read more »

Toni
Toni
6 years ago

Rather than print all of my statements, I like to save the pdf file and store it in an online storage folder. Filed under a folder for the year, with the name of the document using the service provider name and the month and year. I have several years of these and didn’t have to print them out.

Laura
Laura
6 years ago
Reply to  Toni

I do this too with my bank account statements. Also my paystubs, and all online bill payments, and of course I keep PDF’s of my tax returns with attachments. I now have these going back 5+ years. They’re filed as Financial Records > General Category (taxes, bank statements, paystubs, utility payments, mortgage, etc.) > Year > naming-convention-like-Wells-Fargo-mortgage-payment-2014-07. If you have a pertinent email trail regarding an expense, it helps a lot to print it as a PDF and include it. Adobe Acrobat Professional allows one to add other PDF’s to a master PDF so everything related to one expense can… Read more »

Carla
Carla
6 years ago

I’ve never been audited by the IRS (the constant audits I get from Social Security is enough!) but this is a good reminder for me to better organize my paperwork. My most complicated tax year was 2009 when I had multiple W-4s, a 1099, CA disability, disability insurance and had to file for two states. I didn’t earn a lot of money but it was a lot of paperwork. I hired an accountant for that but I need to get the paperwork in a searchable format.

Mario Adventuresinfrugal
Mario Adventuresinfrugal
6 years ago

I never have, but I know that it’s only a matter of time. I am on the fence every year about handing everything over to a professional, but haven’t yet made that leap.

PawPrint
PawPrint
6 years ago

My brother-in-law got audited several times–not sure if he still does. He’s a teacher and documents all his out-of-pocket teaching expenses. He also copies all of the relevant tax laws so he can prove why he took a certain deduction. I bet he could be a tax professional at this point.

While we didn’t get audited, we got caught in the 4464 trap and didn’t receive our refund, which for a variety of reasons was quite large, until this week. We filed in March. The IRS did include $25 of interest.

Lis
Lis
6 years ago

As someone who’s starting a small business, this worries me. I have enough difficulty doing my own taxes! (Not really – TurboTax has taken care of me for two years) Even though I’m always as honest as I can be on my taxes, I’m terrified of being audited and finding out that I did something wrong and the government presuming I did it on purpose. Seth, your comment is helpful… I always try to be polite and courteous. Definitely a great read – Thanks!

Janet S
Janet S
6 years ago
Reply to  Lis

Lis – My advice would be to hire a CPA to do your taxes the first year and get that person’s advice on allowable deductions, how to document, etc, and then you should feel more comfortable going back to filing your own taxes after that. (Although my understanding of Turbo Tax is that it prompts you with questions to guide you so you don’t miss anything, assuming you have the appropriate version of the program.)

Curtis@PayOffMyRentals
6 years ago
Reply to  Lis

Been self-employed for most of my adult life…last 30+ years. Never been audited. But, then again, I’m honest. The advice in JD’s post is worth following. Don’t mix personal and business expenses. I might add…err on the side of caution when deducting expenses. I had a home office and deducted appropriately for the majority of those years.

I just don’t stay awake worrying about such things. A clean conscious makes for a soft pillow at night.

Chris
Chris
6 years ago

Just tell the IRS that it was on a hard drive that crashed and if they try to take you to court then plead the 5th. That excuse works right?

…too soon? 🙂

Jim
Jim
6 years ago

I wasn’t audited, per se, but in 2012 the IRS asked me to prove that I had actually deployed to Afghanistan in ’09 (those months were tax-free). Luckily I keep all my documents and knew right where to look for what they needed!

mary w
mary w
6 years ago

I’ve had “paper audits” a couple of times. Not sure what the correct term is. Back in the ’80s I deducted the expense of energy efficient windows. A year or two later I received a letter requesting back up info. I copied the bill, proof of payment, info about the windows, etc. and that satisfied the IRS.

I few years ago I deducted part of the cost of a solar electric system. My accountant suggested I file a hard copy return that year and attach copies of basic documentation concerning the return. I guess that answered any questions they had.

Sharon
Sharon
6 years ago

The only time I was audited was when I got divorced and took over the mortgage. The bank issued the 1099 for mortgage interest in my ex-husband’s name and the IRS took issue with that. I submitted a statement and copies of all the cancelled checks showing I was paying the mortgage on my own and it satisfied the IRS. It was still stressful!

Zambian Lady
Zambian Lady
6 years ago

Thank God I am exempted from paying taxes (though I realize the importance of taxes). JD, good to know that all went well.

sarah
sarah
6 years ago

It seems silly to not take the home office deduction just out of fear of getting an audit. Maybe if your house was huge and your rent low it wouldn’t be that big of a deal? For me, it was very significant.

Julie
Julie
6 years ago

Been through several on behalf of my company and I will tell you the outcome largely depends on the auditor. One was reasonable, one was so-so, and one in particular had let the feeling of power go to her head. My experience with her was one of the most stressful times of my life. This was several years before the IRS scandal. Because of this situation I already had a very low opinion of the IRS and it just continues to sink the more I hear about them. They have all of the power and you have none. What I… Read more »

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