The Dreaded Letter
The thick IRS letter arrived and I assumed it enclosed the tax forms I ordered. I was wrong. The letter contained a list of 5 sources of income that were not included on my 2010 tax return. Total bill due the IRS including penalties and interest, $25,000.00.
Panic set in.
Ironically, 2010 was the year I was exceptionally familiar with the tax law as I served as a VITA volunteer tax preparer for the IRS. What was going on?
I caught my breath and raced upstairs to my home office to look for the 2010 return. Fortunately, even after a cross country move, I found the file containing the returns and a back up file.
Call to the IRS
After failure to reach my accountant (I guess 9:30 PM is a bit late for an accountant to be working), I decided to call the IRS early the next morning. I was quickly transferred to someone in the audit department. This helpful and confident man walked me through every item in the letter. We discussed what information the IRS needed. He gave me details and tips to avoid problems with this audit.
“Don’t sign at section one as that admits to owing the tax!”
I am in the midst of the arduous process of going through each of the claims and providing support that shows I have complied with the law and do not owe any additional tax.
Why was I Targeted for an Audit?
The major culprits were two certificates of deposit (CD) that came due in 2010. Last time I checked, as long as I paid the tax due on the interest received on the CDs, which I did, I was in compliance with the IRS. Here’s the problem, the principal received when the CDs came due were listed on my aggregate brokerage statement. I didn’t include this repayment of principal as I didn’t think it was necessary.
Fortunately, the fix for this oversight is to prepare an amended schedule D with the cost basis and sales price listed on the CDS. Since these amounts are the same, no tax is due.
There were three more items on the audit. Two of them dealt with education credits. The IRS wanted to make sure we incurred the tuition costs for which we were claiming a credit. Another quick search revealed I had no idea where my receipts were for the tuition we paid on behalf of Jr. Carino for her college expenses in 2010. No problem. After a quick call to the University, the assistant controller emailed me a receipt of tuition payments.
The final two issues regarded an IRA rollover. I’ve been combing IRS documents for two days. Have you ever tried to make sense of these booklets? I don’t know who they are written for, but it is not the general public.
As far as I can tell, without revealing too many details, there is no tax due on those rollovers either.
According to my calculations, we don’t owe anything and we have back up and documentation for all the contested items.
Tips for Handling a Tax Audit
Audits sometimes happen. Usually they begin with a letter in the mail. In fact, I’ve been through this before and am confident that our issues will be resolved after a lot of research, documentation, and letter writing. These tips will serve you well in handling your records and preparing you for the dreaded “audit letter”.
- Keep copies of prior year tax returns.
- Keep copies of all documentation to back up the returns.
- Know where your copies are.
- If you have an accountant prepare your taxes, understand the documents yourself as well.
- Call the IRS for clarification. This lets the IRS know you are responsible and gives you additional information and clarification.
- Make notes on the IRS conversation.
- After completing the amended documents required, write a detailed letter outlining your case. Leave nothing out.
- Keep copies of everything.
- Send the information back to the IRS in a certified, return receipt packet. That way you have a record of the date mailed.
- Follow up with a call to the IRS in a month to check on the progress of the audit.
- Consider using a program like Turbo Tax 2012 to make your records easy to access in the future.
Life throws you curve balls when you least expect them. Be resilient and tackle the issues head on. You will get through the tax audit. Accept that it will take time, organization, and follow through.
Can’t Get Enough Tax Audit Information?
10 Most Im portant Things to Know About a Tax Audit; IRS Tax Attorney
How to Handle a Tax Audit; Smart Money
How to Handle a Tax Audit; Financial Highway
How to Handle a Tax Audit; Bloomburg Businessweek
Have you ever gone through a tax audit? How did it work out?