Audit Stories

How "Correct" is your tax return?

Here is a real life example.  These demonstrate who is responsible for your return, even if the return is prepared by yourself using "Do It Yourself" tax software. The return was seriously incorrect, and was audited due to the program not properly handling business costs and expenses.

Tiernan & Associates has been in business for many years and we have found that many taxpayers are not fond of having to owe the government. So, we have tried to educate people, to best of our ability, about what is and what is not deductible. Often for those that have done well, the net tax effect may equal many dollars in taxes. As a result, the taxpayer may choose to do their own return using "Do It Yourself" tax software. Despite the heavy advertising in the media, the software is not accurate and throrough as the taxpayer attempts to reduce the tax to lower their tax burden.

The example below demonstrates the risks of this approach. 

-EXAMPLE 1-

This small business owner had been doing their own tax returns for several years using one of the well known "Do it yourself" tax programs. Tax year 2008 they prepared their own return as usual. She had a home based sales business and followed all the steps according to the program and entered the numbers accordingly.

The program generated a return that allowed office in the home expenses entered multiple times, and caused a $15,000 loss on her business.  This was entirely incorrect as the program improperly handled her inventory, purchases as well as business use of home expenses.

This loss created a very large refund and the taxpayers were elated! Tax year 2009, they prepared their own return again, and the results were good, but not as good as the year before. December 2010 the IRS audited their 2008 return questioning the huge business loss. The IRS challenged the position that she even had a business. The audit also included an audit of their 2009 return as well.

They contacted us for assistance. We were able to submit information to show she indeed did have a business, but her expenses were way out of line for her income. In addition, the auditor also audited their personal income. That included looking at all their banking information. During that phase, the IRS identified $30,000 of income that the taxpayer could not account for. As a result, the taxpayers had to include that amount as income for that year and pay tax on it. Therefore the IRS was asking for nearly $22,000 in additional taxes, penalties and interest combined for both years.

With our help, and lots of document searching and submitting, we were able to provide information to the auditor and his supervisor that led to the amount the couple owed being lowered to $11,000. That is still a large amount of money, but 1/2 of what was originally levied against them.

Bottom line, none of the "Do it yourself" tax programs handle small businesses correctly, unless you have accounting training or accounting experience.  We helped this client with 2008 & 2009, but in the end they still owed nearly $11,000 in taxes and penalties due to the tax program not handling the business portion correctly.

The reason for sharing this information is to inform people that yes, you may get a better tax return and save some money using a "Do It Yourself" Tax Program.  However, you need to know that your return is being prepared correctly. You need to know that what is put on the return is ultimately your responsibility and if you are ever questioned you will have to support the information on the tax return. With the current increase in the number of small home-based business audits this is becoming ever more apparent. The question that taxpayers need to ask themselves is when they decide to prepare their own return, is not only whether they can save some money but do they have the essential knowledge in correctly preparing a “home-based business” tax return.

Last Modified: 12/11/2014