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Discussion:HELP! AUDIT!!

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Discussion Forum Index --> Tax Questions --> HELP! AUDIT!!


ZoeCPA (talk|edits) said:

2 May 2006
I've been preparing tax returns for 5 years now, and just received my first audit. Before I call the examiner, I would like a few pointers. The examiner's letter states that he will be looking at depreciation and Gross receipts. My Client is a realtor, and bought a SUV over 6,000 lbs in 2004, so he took a Section 179 deduction of $52,319. He received a 1099 (from his father) of $136,500 and the Sec 179 and SEP of $15647 was the only deductions. I think the only other issue is that my client had $82,000 in K-1 income in 2003 that is not there in 2004 (his portion of the S-corp shares were also transferred to his father, who DID report them on his tax return). Any advice any of you could give me will be greatly appreciated.

JR1 (talk|edits) said:

2 May 2006
Sounds like nothing! Except for a capital gain or loss reporting on the S corp transfer...might as well work that up now if you left it out. Auditor is going to want proof of biz use for that big SUV writeoff. I aggressivley take my realtors at 100%. Everywhere they look and go is real estate. I refuse to believe that they're not working every time they look at land!

Warren (talk|edits) said:

2 May 2006
Did your client sell the S Corp shares to his father? If so, you client should report the gain or loss on sale. If he gave the shares to his father, your client should have filed a gift tax return. For the SUV, his business use percentage will be a big issue. Your client should have a detailed mileage log for his useage of the vehicle. Did your client have gasoline and insurance expenses for the vehicle?

Warren (talk|edits) said:

2 May 2006
Taking 100% business use on a tax return is one thing and supporting the use during an audit is another. The IRS auditor will not let business use of 100% fly without some kind of documentation. I'm not saying don't be aggressive, but have as much documentation as possible. Preferably a written mileage log. Looking at land can be a business purpose, but it should be documented with a mileage log.

ZoeCPA (talk|edits) said:

2 May 2006
Thanks for you quick replies. Mileage log is no problem. The S-corp may be though... I don't handle the S-Corp, so I don't know the details. Simply my client got a K-1 in 2003, did not get one in 2004, but his father got one in 2004. I guess I should have asked more questions from my client, but didn't. Am I supposed to have the details on shareholder transfers for an S-corp return that someone else prepared??

Taxref (talk|edits) said:

2 May 2006
I assume your client had a checking account dedicated to his business. If deposits exceed the amount claimed as sales he will need to verify that the extra receipts were not sales; I have seen that issue in the past. Since a home office wasn't claimed, 100% business use of the vehicle will not fly, unless he used a different car to drive to where the SUV is parked. If your client cannot verify at least 50% business use the 179 deduction will not stand either. I agree that while looking at land can be business travel, a realtor cannot deduct miles simply because he sees land while on personal travel.

Taxref (talk|edits) said:

2 May 2006
You shouldn't bring up the S corp (or any other issue for that matter) unless asked about it by the auditor. Since he had the shares one year and not the next, it would have been a good idea to ask about the details of the transfer. If not a gift there would have been a reportable transaction.

ZoeCPA (talk|edits) said:

2 May 2006
His mileage log shows that he used the vehicle 60% for business, so I don't think that will be a problem. I will get him to look at his checking account though, that's a good point. But I'm still concerned about the S-corp, will simply the absence of a K-1 trigger an audit of the S-corp and all the other officers of this S-corp? Again, I did not prepare the S-corp return, and don't think any income went unreported, but I'm getting worried about it!

ZoeCPA (talk|edits) said:

2 May 2006
Thanks Taxref, you posted that answer while I was writing my questions. I will find out, but pretty sure it was a nominal gift.

Warren (talk|edits) said:

2 May 2006
And if it was a gift and over the $11,000 limit (in 2003 or 2004), in was reportable on a gift tax return (Form 709).

DZCPA (talk|edits) said:

3 May 2006
I agree with Taxref, Do not bring up the S corp. This audit is for 2004. The audit was triggered by the $52,000 write off. Did the SUV cost aprox $87,000 X 60% = $52,000?. Gather up more deductions like cell phone, dues, online internet fees, license, meals & ent, office supplies. Dump them on the auditors desk if he does not like your auto log. I hope you wrote thoses items off in 2005!

Susan CF (talk|edits) said:

23 June 2006
Hi Zoe,

I am a bit late on the intake of this question. I would assume you more then likely have already gone through the audit with your client. Well anyway, FYI I too had a client audited for auto expense deductions. The audit initially was prompt on his return (1040 Sch C) as a result of continuous losses extended over five years. When the auditor found the tax payer had more then adequate records to substanciate every customer invoice and corresponding deposit as well as documentation of other personal money deposited from the taxpayers personal loans & credit cards she decided to pick on the assets specifically the use of two vehicles. There was a 100% business use vehicle which it was clear that this was a vehicle used solely for business use. The other was 40% business usage... with NO mileage log! I prevailed by utilizing the client's mileage recorded. Each time his vehicle was serviced these records identified beginning & year end mileage (total miles vehicle driven). I then substantiated the amount of business miles by using the client's calender where he recorded on a daily basis all of his appointments. The personal vehicle usage was cut back to 38%. End result was less then $100 due to the IRS. Since this amount due was under $100 the IRS waived the amount due. My client won his case with ZERO additional tax liability but unfortunately for him he owed me over $1,900 in audit fees. Hope your audit went well. Take care, Susan

DZCPA (talk|edits) said:

23 June 2006
Just was notified of my first audit of the year. Middle of June? Did over 1,000 returns last year. Are the IRS auditing more? I had only 2 audits last year. Might get it up to 3 or 4 by year end!

Jake (talk|edits) said:

24 June 2006
I know that IRS has 3 years from date of filing to audit - but when can you assume you are in the clear. Example, for a 2004 return filed 4-15-2005 would you have heard by now if IRS was going to audit?

DZCPA (talk|edits) said:

26 June 2006
Rarely have I seen audits with less than 8 months to go before the 3 year date.

Janakpatel (talk|edits) said:

29 June 2006
My clients were audited in their third year after they filed their original returns. IRS wants to collect more in interest and penalties too.

Acctax (talk|edits) said:

29 June 2006
Had my first audit this year on 6/27. I asked if the audit was random or not. He informed me that the IRS has now concentrated on small businesses for auditing. He did not state what areas in US or how long. I will find out as we have a follow-up date set in July to finish up 2nd Sch. C. Everything looking good so far. Auditor is very easygoing with a great attitude.

Warren (talk|edits) said:

29 June 2006
I have had fewer audit lately than usual. I do about 500 tax returns and only had 1 audit last year that started in March 2005 and finished in May 2005 (an S Corp). None this year so far. It's unusual for me to go over 12 months -- not that I'm complaining.

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