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!
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.