newlifeinparadise

I am just curious as to how many people get audited as our accountant is offering some kind of insurance/pre pay package to represent us to the IRS if we are audited.

We've decided not to take it. Though we are having the services of the accountant for the actual tax returns, so hopefully we won't have issues anyway.

How many people have been audited here? and was it a moderately straightforward process to respond and conclude it?

Thanks

Chrisdc

Like most insurance questions, it's really up to you.

I haven't been audited - but know a couple of small business owners who have. They reported that it was nightmarish.

I would say the choice to take insurance depends on:

a) The complexity of your taxes
b) Your tolerance for risk.

If your taxes are simple, and you are complying with the law - fear of audit should be negligible. If your taxes are complex, and you are liberal in taking deductions and write-offs, then maybe audit is a more scary prospect. Certain items are "believed" to be red-flags for audit. The one I hear quoted most often is deducting a portion of your rent for working from home.

Previous accountants of mine have included representation in their fee as a matter of course. Not sure how common that is.

HTH!
C

md95065

There are several different levels of IRS "audit".

The most common of these (which has happened to me 2 or 3 times in 25 years) is that you get a letter from the IRS which essentially says:

"We reviewed your tax return for the year before last and found some discrepancies, we think that you owe us an additional $X, please pay up".

To which you respond something like:

"I had some income that was double reported on both a W2 and a 1099B - here is a 1040X amended return for that year".

This mail dialog goes on for some time until you and the IRS come to an agreement about who actually owes what to whom. It's a bit tedious but not at all scary. If you have a fairly straightforward return with all of your income coming from employment and investments and reported on various W2 and 1099 forms and you don't have any weird deductions then it is very unlikely that you will ever experience anything worse than this.

newlifeinparadise

Thanks for your replies.

Our taxes will involve the following:

My husbands US employment income.
The interest on our UK savings
The income and expenditure for our UK property that we will be letting

So I assume this comes under the straightforward category! I hope so anyway.

But if the worst thing that can happen is they decide you owe a bit extra and you have to negotiate with them, that's not too bad. Especially given that we will have paid an accountant so will be asking them why the IRS want more money if they have filed our tax in the UK and USA correctly!

Just wondering, you mentioned weird deduction - what would you consider to be one of those? :-)

Chrisdc

Deducting your cable bill because you work in TV and need to watch television for your job.... ;-)

limeynus

Yep ... in 23 years in the US I have had one of these a couple of years ago.

Mummy in the foothills

We've had one in 25 years, and it was a letter asking for more proof, something we hadn't included (my mistake) and once they got it, they paid us our refund very quickly.

Bluegrass Lass

Hopefully I'm not jinxing myself here, but I haven't been audited in the 15years I've been paying taxes. But it can always happen.

Noorah101

My alien husband is self-employeed, and we got one of those letters from IRS once. Our CPA (at that time, I've since changed!) did our tax return showing my husband made quarterly payments to IRS during the year. IRS wrote to us, saying they don't have a record of his payments. I wrote back that no, he did NOT make payments, and we got it resolved quickly.

Changed CPA's right after that!!

Rene

Bob

As long as you can explain it, sure, why not.

I know a few folks in games industry who deduct cost of consoles, tablets and games and put it down as research.

Do need to meet a threshold of expense first though, something like $2K?

Chrisdc

Indeed!

Your deductions all have to add up to more than the standard deduction to make it worthwhile choosing to itemize. The standard deduction is almost 6K I believe, for single filers.

I had a time when I was deducting expenses against rental income from my apartment in London, which opened up the itemization route... and then it was possible to add those more interesting deductions on top. All totally legal and justifiable, but definitely exotic!

C

md95065

Deductions for a "home office" are usually a big red flag to the IRS as are all sorts of deductions for unreimbursed "business expenses", particularly if you are self employed.

So, yes, perhaps you can justify deducting the cost of your cable bill but you had better be prepared to convince the IRS that it is a legitimate deduction if they ask about it. (Of course, the IRS won't even know that you were claiming your cable bill as an expense unless they do audit you because all they will see are the total amounts of the various categories of deduction - the reason that they audit you will be because, among other things, that total amount seemed excessive in the circumstances)

TimFountain

After 12 years, I got my first audit and demand for $22K from my 2010 return a couple of weeks back. I just about had a heart attack. Turns out that etrade is retarded when it comes to reporting restricted stock and stock option trades and reports the total sale price not the gain, since they claim not to know how to calculate the cost basis for the shares. My CPA quickly worked through it and found they had made an error on the original return, meaning the CPA believes the IRS owes me ~$200 as opposed to me owing them $22k! The CPA said that this was the 3rd etrade share issue she had seen in the last month and was a new revenue grab attempt by the IRS.

We are in the throes of the CPA talking to the IRS. I gave them signed, notarized authority to talk to the IRS on my behalf, and I took the audit guarantee when I filed that year so all their work on straightening this out is on their dime.

Was pretty scary to get that grey envelope, but I hope it is all going to be resolved soon.

As a side note the interest they asked for on the money they claimed I owed them was 20% and they charged $2K in penalties on top of that! Where can I get a 20% return on my capital? You government at its finest!

davidtheprof

Red flags for audits: home office, large expenses for self-employed in relation to income (they have ratio guidelines for various types of business), also important is variability in expenses and charitable donations - erratic and sudden changes in deductions.
Be interested to know if foreign bank disclosure is a flag.

Steve_

Depends on how good your accountant is, if they're total crap then you should have the insurance.

But wouldn't the money be better spent on a better accountant, I always think?

Some of the stuff I've seen on here and also encountered talking to people just blows my mind. The lesson is to not be so trusting of accountants, imo.

As one example various people have posted on here about getting weird tax refunds, usually because they didn't file dual-status the first year they were in the US and I know someone who asked H&R Block to do their return, had that happen because they hadn't filed a dual-status return and then H&R Block tried to weasel out of their guarantee by saying the correct information hadn't been provided to them.

Lesson: don't use H&R Block, they're crap.

Anyway, if you know how to do taxes and you've got a good accountant, then audits should be something you don't fear. Some audits are chosen entirely randomly, they can actually be helpful, they might point out some tax break you should be claiming.

IRS publication 519.