Discussion:IRS Auditor looking at deprec basis - opinions?
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Discussion Forum Index --> Tax Questions --> IRS Auditor looking at deprec basis - opinions?
| 11 August 2009 | |
| I am currently involved in an audit of 2007, and the auditor is requesting information regarding a rental property purchased in 1997. The property was set up for depreciation in 1997, and now the auditor wants closing statements, allocation of land versus buildings, etc... to support the depreciation deduction of approximately $3000. My inclination is to tell him its a closed year, and try to let it go... Let me be clear, there are no issues to hide, but I'd like to restrict her fishing expedition.
Anyone have any strong opinions or experience in this area? | |
| 11 August 2009 | |
| If depreciation for the rental property is on the 2007 tax return, the auditor has every right to request documentation to support that deduction. | |
| 11 August 2009 | |
| you would look foolish to state that depreciation taken this year stems from a closed year. Who cares where it stems from? You have to prove basis ALWAYS. If you can't prove it, you lose it. Depreciation is a deduction against basis. No basis = no depreciation. End of audit. You lose. Or rather your client loses.
Don't do that. | |
| 11 August 2009 | |
| (this would have been a good question on the EA exam for those wishing to become EAs) | |
| 11 August 2009 | |
| So here is my question - is the basis never considered a closed year? If the auditor finds fault with the land versus structure allocation done in 1997 (way before I started with the client) is that still on the table? Many times the records aren't readily available - for example the auditor wants a 1997 property tax statement so they can look at land versus building allocation - how many clients maintain that level of detail that far back? For that matter, how many accountants can provide that? I'm just curious - what are the limits, or are there any limits? | |
Death&Taxes (talk|edits) said: | 11 August 2009 |
| Let's simplify: if your client bought a stock in 1997, would you expect IRS to accept the basis without proof if sold in 2007? Before you say that they could look up the cost, remember the stock could have been gifted to your client in 1997, or perhaps they were bearer bonds lifted from a burning house.
Basis and allocation are always in play. Client bought a resort property in 1977; in 1983, 18 days before the law changed, he tore it down and took a demolition loss, which was audited. Auditor could not dispute the total cost since we had a HUD-1, but went after the allocation of land to building. Client had used 10% for land, and since land cannot be demolished, an upward adjustment would diminish the loss. I was lucky to talk auditor into using the cost of the replacement, which was similar in structure to the property demolished, and taking it back to 1977, resulting in an adjustment of less than $10,000. | |
| 12 August 2009 | |
| Basis records should be kept almost forever since the IRS can challenge basis at any time, not just in the year of acquisition. | |
| 12 August 2009 | |
| Taxpayers holding assets must adhere to maintaining permanent and accurate records documenting "basis" - look to the Publications for record keeping requirements.
With respect to your question "is the basis never considered a closed year?" in my view it is not, since it is the source for an open year's depreciation expense and an eventual gain or loss on disposition. Lastly, you ask, "how many accountants can provide that?" - well most or all that I know, the land value is maintained by the county appraisers office. 10% land value, appears to be a guess, and could well lead to a inaccuracy penalty. | |
Harry Boscoe (talk|edits) said: | 12 August 2009 |
| "...bearer bonds lifted from a burning house." Now *there's* an image! | |
| 12 August 2009 | |
| I really appreceiate the input, I just struggle a bit with the practical side of it. I agree basis records are to be kept forever. When I look at a situation like this, however, it makes me think how many times have I had a new client come in with a rental set up for depreciation by someone else. I think most will agree that any land / structure allocation was probably calcualted by the prior accountant, and most clients do not have records to support whatever calculation was done - it's a grey hole I've never considered before...
So that leads me to another question - how about other carryover items on a return. Contribution carryover, for example. Do those ever "close" for examination? If you have a five year carryover window, can an auditor challenge a carryover created four years ago? The depreciation discussion leads that any item which results in a current year impact is open for exam - makes me wonder? | |
| 12 August 2009 | |
| any carryover item is open itself to determine the amount available to carry to the current year. If the contribution never existed, then the closed years are closed, but the open years allowance is zero. | |
| 12 August 2009 | |
| TM2009, please fill out your profile since you are answering so many questions we'd like to know something about you. | |
| 12 August 2009 | |
| I don't know about where you are, but the assessor for my county has a file on my house that goes back to when it was built. If I wanted the breakdown between land and building when dinosaurs walked the earth, he has it. Yours might too. | |
Death&Taxes (talk|edits) said: | 12 August 2009 |
| But we might also discuss the implications of assessments, and how accurately that can reflect the values set on buildings and land. There are places in my area where properties were last reassessed in the mid-80s. While land increases in value, buildings and appurtenances put on that land in the interim will not be fairly assessed. Then there are cases where reassessment was done in 2005-07, before the bust, where it is theoretically possible that land values could exceed the total cost of the property if purchased today. Assessments are political in nature in that localities often do not reassess because it can lead to being voted out of office. | |
Outwesttax (talk|edits) said: | 13 August 2009 |
| I had a similar request recently where the auditor was not only looking for the cost but that it was titled in the LLC name. (It was) | |
| 13 August 2009 | |
| Agree with Mscash, take a look at what is available in TX. Appraisal values for virtually any property in TX. Plus County Clerk records in many cases.
http://www.taxnetusa.com/research/ In my county, Wichita, I can look up online values going back to 2005 for anyone in my county.[see link below] The appraisal district has records going back who knows how far. Tax appraised value of land and improvements [buildings and structures] is seperately stated, and 1997 is not that long ago. The purchase of my home and land is on record as well and that was 1980. I suspect every county/parish in the U.S. has similar types of records for real estate purchases, going back to when it was purchased. Wichita county appraises values annually. http://propaccess.wadtx.com/clientdb/?cid=1 Just type in a last name and year [to 2005] to search for properties and appraised values. Using Advanced Search you can search by address or street and other criteria. Who knows what the Real Estate Agents have available to them. | |
