Discussion:Personal Living Expenses (PLE)

It's an office audit, and the auditor is looking for unreported income. As everyone knows, the IRS is focusing on taxpayers who show Schedule C losses that will offset their other income, because the taxpayer may have just pocketed the cash. The auditor believes this industry is one that is known for cash payments.

As one of the audit steps, the auditor is asking the client to make a list of all of her monthly living expenses. The auditor provided a list of items to include in the list. She called the list the PLE, or the Personal Living Expenses exercise. The auditor sounded as though she'd plug the numbers into IRS software to determine if they were reasonable.

There have been no indications to me of unreported income. The client lived within her means. The business was bona fide and it was very profitable the following year.

Regarding the personal living expense exercise, besides the obvious fact that the expenses shouldn't be greater than cash received, are there any other things to be aware of? How much can an auditor rely on this exercise, if there are no other indicators of unreported income?

I haven't found anything about talks about the PLE issue in my research. Don't want to make it too complicated, but don't want to be naive either.

Thank you for your wisdom.

1) you want the expenses for the year at issue, not now (he may have lived on mac-'n-cheese & Raman noodles that year, not filet mignon and escargots-Rockefeller).

2) It seems odd that they will use actual expenses for this, but national and local standards for collection (hint - look at the collection standard living expenses as a guide).

3) There is always the fact that the taxpayer had cash at the beginning of the year which he used (savings account), credit card or other borrowing (do we tell clients to keep all of their statements?) or other non-taxable sources of money. Maybe he got behind on his house payment or other bills. Look at his actual check register to figure this out.

4) You would want to use the Cash T analysis before turning anything in - the client will be hung by his tounge, so be careful what info you volunteer.

If the loss is not large, it could also be that this examiner is only following a procedure.

The auditor was clearly looking for unreported income but did not ask PLE questions.

be very careful.

It is possible that the auditor has audited a company that PAID your client and noticed something like the check was "cashed" not deposited, or cash was paid or one of many other things.

I have seen this a few times before.

Look your client in the eye and ask them and be certain or you may get blind sided.