Discussion:Sch C Audit

I have a client that got picked out for an audit who gets a Statutory W-2 with only state w/h (CA) since his company is located out of state. I claim all his expenses on Sch C. Most of his expenses are being knocked out because we have to proof that they are "ordinary & necessary to his business". We provided all the receipts with explanations and names of clients but the auditor is still claiming that she can't read the receipts (false) or she cannot allow over $25 per gift, although those few gifts were to a group of people(example, box of chocolate to an office location), and some times completely ignoring an entire expense items as if it's not there. Supplies & office expense items are reduced to less than 25% even when showing receipts

I had very few audits in my 30 years experience (just lucky I guess), and never had this attitude from an auditor, and some of them we came out ahead even. Today I spoke with the auditor and she was very dry and stubborn with no signs of understanding whatsoever. Any helpful suggestions on how to handle this auditor would be great. THANKS!

I spoke with her supervisor and explained that the guy overseeded his soccer fields with rye grass which required mowing. We got the gas deduct.

If the receipts are hard to read, sometimes you can scan them and play with the contrast to bring out the info. As far as I know, the law says you have to save receipts. I have many receipts that fade after 6 months and are ilegible. Is that my problem? I saved my receipt. It's not my fault the supplier uses cheap paper. I have client that use neat receipts to scan them but that is not required by law. I have ofter wondered about the outcome of such an argument at an audit.

A manager's conference will often work if the TCO is a "problem" employee, as low-quality work might be caught at higher administrative levels and reflect back on the group manager. But if you want attorney fees, and you have put evidence in the administrative file that all requested records have been provided for a given issue, and that you have completely cooperated, take it directly to appeals. Log your time. There are some small law firms that bring in six figures in attorney fees because they follow these procedures. It does not always work, (there are many cases which put a significant burden on the taxpayer in order to get fees) of course - you must have a solid administrative record which reflects all the requirements of IRC § 7430, but in cases where you get really bad decisions out of compliance, it can be rewarding.

All tax professionals who pride themselves on being compentent at representation should be very familiar with IRC § 7430 and the many cases associated with it, as it is an important tool.