A Sad Tax Story
Some may say that any story about tax is sad but this one was particularly unfortunate because it really could have been avoided completely with just a little more preparation/time. It goes like this. Husband and Wife Taxpayers have been audited four times by the IRS at various levels, including a full blown sit-down audit of their entire tax return one year. It’s been a mess for them every time and every time, they’ve had the records to support their return. So why the audits? Well, to understand that, you have to remember that whenever the IRS can “verify” information, there’s rarely a need to check it out further but when the information can’t be verified, concerns could arise and an inquiry or audit result. Self employed taxpayers often use a schedule C to report self-employment income and expenses. The income is usually verified by the forms received by the IRS but the expenses are a different story…for that reason Schedule C is a “suspect” form and is highly succeptible to auditing. That’s what’s been happening with these taxpayers.
So here’s where the sad happens. They finally decided that it was better for them to actually incorporate their business and file a separate business return. This way they receive a K-1 (like a 1099) for any self-employment income or loss. The business reports teh same information to the IRS so it can be verified when they reflect it on their personal return. They even amended the tax year in question and resubmitted their personal return WITHOUT a Schedule C. About 30 days after the amended return had been sent, they received a substantial audit request on the Schedule C for the OLD return. They’re hoping to be able to clear it up without any major tax work because of the amendment but they’re still going to have to mess with the Examiner and pay a Tax Attorney (us) to get the issue resolved.
Now I’ll had lots of interaction with IRS personnel and have yet to deal with anyone that wasn’t both helpful and professional. But the system of audits itself sure seems to be unfair. I know some who’ve never been audited ever and others (like these folks) who’s number seems to be drawn on a regular basis. When they finally figured out how to get out of the cross-hairs, they still got tagged for the old return.