Audit Stories
How "Correct" is your tax return?
Here are 2 real life examples. The first showing who is responsible for your return, even if the return is prepared by someone else. The second by someone who prepared their own return and was audited due to the program not properly handling business costs and expenses.
Both include examples of how NOT to proceed if you are given an audit.
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 seek out other professionals to help reduce the tax to attempt to lower their tax burden.
This is not atypical, if an individual does not care for the results of our preparation, and then they seek out others that can provide better results. We have found, however, that the change may reduce your total tax but it may also raise flags to the government if that other accountant is too aggressive. As the taxpayer you are responsible for every item on your tax return.
I recently spoke to a former client that has a very successful home-based business. One particular year, (2004) Tiernan & Associates had prepared a tax return and the results of the return had the taxpayer owing approx $5,800. We confirmed with the client that there were no additional expenses for the business. Unbeknownst to Tiernan & Associates, the taxpayer then had the same return prepared by a different firm and as a result, the taxpayer’s taxes dropped by $4,100 such that the return reflected her only owing $1,700. The taxpayer recently received a letter from the IRS stating that that particular year is now subject to an audit.
The taxpayer has since contacted us for assistance. When she first contacted us, I had not yet reviewed the original filed return, to see exactly what and how it was filed. However, we have determined that to reduce the tax by over $4,100 her total net income would have to have dropped by $15,000. The question that I had not yet determined, was where did the additional expenses originate? The taxpayer went by herself to the audit, which I never recommend. Due to the initial audit results the auditor will now audit the next two succeeding tax years.
-update- (12/19/07)
After a thorough review of the return as filed, and what little documentation she had provided, we determined that there were over $10,000 of expenses claimed on the original filed return (done by the other firm) that were overstated, i.e. the numbers were not accurate. This has resulted in additional tax of about $9,000 and interest & penalties of approximately $9,000 for a total of $18,000that is now owed to the IRS. In addition, the taxpayer contacted the person that prepared the filed return, and, per the client, the preparer recommended that she go to the audit herself and "play stupid." As a result of following this advice, the client is now subject to a $18,000 bill to the IRS and the subsequent two years are in process of audit. The bottom line is, you, as the person responsible for your return, should be certain that the person preparing your return is knowledgeable and understands your specific home based business. It is our belief, that had this client filed the return that we prepared, and followed our advice, her chances of audit would have been greatly reduced, and she might not be looking at additional debt to the IRS of $18,000.
-update- (7/19/08)
After two more meetingins with the auditor and us presenting much more information over the course of 2 months, the final audit result was lowered to $9,000 with the client incurring much expense to correct the information.
This client decided to save herself some money, and prepared her own return using one of the well known "Do it yourself" tax programs. 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 with a $15,000 loss on her business. This was entirely incorrect as the program improperly handled her inventory and purchases.
This loss created a very large refund and also triggered an audit by the IRS. The IRS challenged the position that she even had a business. 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.
By the end of September, the auditor had reduced the amount she owed by 2/3. The bad part is that the IRS then audited 2005, and 2006 for the same reasons.
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 2005 & 2006, but in the end she still owed nearly $5,000 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 from another tax firm, or 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 have someone assist them in filing a return, is not only whether that person can save them money but do they have the essential knowledge in correctly preparing a “home-based business” tax return.
Last Modified: 10/12/2009
