Board of Equalization
Currently a work in process with a CPA auditor and his intern. It involves a research material storage and sales company involved in handling excess equipment from corporate mergers for domestic and international companies. This business has Ultra modern warehouse facilities and computer software. The Client is very sophisticated and has a good handle on things. Audit consists of California sales of equipment and technical supplies. The Only problem is one I see in almost all clients--that the client is too dependent on computer software and lacks hard copies and original paperwork on sales and purchases. This business has gone from inception to six million in sales this year with a realistic goal of 25 million. Two overseas branches have been established. It is a true entrepreneurial enterprise accomplished with no debts or liabilities.
Offer in Compromise
This was concluded over the past three months. A client was in “Uncollectible Status” with the IRS due to unemployment which led to bankruptcy. They are ordinary people overwhelmed by the Great Recession and an intense desire to get back into the mainstream again. Client family and children are living in travel trailer while both secured employment. The original OIC Application was rejected because new earnings exceeded the allowance to eliminate some of the debt. Formula, according to the lady at IRS was that excess earnings over standard living expenses would pay off total debt in remaining eight years of the statutory remaining life of the debt. I was on the phone with the client and on the computer, while she was on the phone back and forth with the auditor, until she was able to revise her income data to make the deal work. She has washed out 80% of her debt and is looking forward to buying a little house soon. I am very pleased we succeeded with this case after taking a reduced fee because their situation was so dire.
Recent IRS audit
An engineer client had attempted to save money by buying TurboTax for $144 and doing his own complicated business returns. He got half of it right but the other half resulted in an audit. The IRS computer scans returns for abnormalities and this return had enough to qualify. Like most educated clients, he was almost totally reliant on his handheld computer. Fortunately, he also had a suitcase of receipts. The auditor, a thirty-year veteran with a corner office and corner windows, kept asking for more and more original documents such as a medical insurance policy, actual receipts for prescriptions, and the usual apportionment of rental house footage for business usage. In the end, many things were corrected. Many other things were disallowed, as expected, the largest being the cash paid medical deductions because there were no receipts. I managed to get the 20% negligence penalty abated for him, which was more than our fee. I see a definite scary trend with the IRS bearing down on the negative “no receipt, no deduction” policy which relates to the other returns audited by mail without a human present [almost true].
Tax Court Appeal
This case was just settled after six months in motion. It began when a new client appeared at 7 PM, one evening in March, our busy month. He was a physical therapist and traveled all over the three-county area to patients, and he was probably the busiest person I know. He had missed an audit, and then ignored the results of their disallowance of all deductions for his business. Now, he had a 90 –day letter, from them, telling him how long he had left to Appeal to Tax Court before losing his case forever. The date stamped on the letter showed two days left to file the petition in the Washington DC Tax Court. We agreed to take the case and had the petition ready for signature when he showed up at 7 PM, the next evening after work. The key item which triggered the audit was the 50,000 business miles expensed, which is truly exceptional.
In the good old days, we would get a call from a Tax Court representative, who would be a high-level IRS auditor asking for an appointment in Riverside of San Diego. This time we received a letter and a call from a manager telling us where we should mail all our supporting documents. No Face-to-Face audit.
This client, because he was so busy driving all over Southern California, had only computer records. Everything was on his computer and he was unable to produce paper copies of his medical billing agency fees and doctors or clinics that referred clients, and any expenses. Worse yet, he had no record of appointments and calls made during the audit period which had been three years ago. I had him type an affidavit explaining the nature of his work and why he didn’t have receipts [his car and computer were his real office]. I wrote a letter explaining how he traveled so much for business, filling his car up with gas every second or third day in different towns, and proving the mileage through oil changes and repair documentation. Four months later, we had the results. They disallowed all deductions except they allowed half of the auto travel [$14,000]. This was a bad win because he simply couldn’t document or print copies of expenses incurred or paid over the computer. There was no request for additional documents. Again, there was no meeting with any auditor to argue any points or beat back a negligence penalty. There was only their letter to sign off on the audit or set a Court appearance date and place. This is another example of the harsh requirement of documentation being the crux of the audit.
This one is currently in motion at this time. A client missed a business audit, ignored correspondence afterward when they disallowed all the deductions, and also missed the Tax Court Appeal. Now, they are filing liens on his property and source of income. This engineer client builds manufacturing equipment per customer specifications. He travels a lot and works about eight days a week like most self-employed talented people. Clients don’t deliberately try to ignore the obvious summons; they are simply too busy to prepare for it and hope it will evaporate into the sunny California sky. Unfortunately, the hungry California Grizzly Bear and the Federal National Debt must be fed from all available sources.
This audit is unique because it is strictly by mail, unless it is deemed too complex for the auditor and an opportunity is made available for a real face-to-face at a local IRS audit office. The audit begins with a mailing of document summaries, backup copies of originals, a cover letter from the client explaining his business, and my cover letter. This package went out with about 125 pages of documentation. We are waiting to hear from them. It is extremely hard to do business this way because you know they do not know the particulars of your business and there is never a response for additional documentation. It is cold assembly line assessment without recourse. There is an old story floating around that, when tax filing became electronic, the thousands of people who would keypunch all the filed returns were reassigned to the “Audit By Mail” returns that they now process. This resulted in the many empty desks I saw at the last audit in San Bernardino. Maybe they are also auditing the Unaffordable Care Act elsewhere.