Audited Because of Very High Income and Extreme Deductions.
I have found that in corporate audits the auditors push for all kinds of extra marginal or disputable issues and many clients fold rather than fight for their rights.
The medical doctor-psychiatrist was used to being audited because of his very high income and extreme deductions. I loved working with this guy because he was intense, sincere, a fun guy, and a good hit for a diet prescription as needed.
On this audit, we went through the gentleman farmer routine which produced large losses and the list of what grew there including his count of "strawberry trees'.
Like I said, he was funny guy who took a lot of chances with his tax returns. One big item that bounced was a huge cash deduction for "name the number prize." The IRS likes factual data to back up ""ordinary and necessary"" business deductions.
In this instance, the good doctor claimed that, for an attention-getter, he would meet with ten foster children in a therapy group session and ask them each to write down a number. Then he would produce a $20 bill and hold it up to show the serial number.
The kid who guessed the right last number got to keep the bill. The Revenue Agent field auditor didn't like this one at all because it was a 'no cash, no deduction' issue which he couldn't prove. Or could he?
We appealed the findings to the Riverside Tax Court where the Revenue Officer just happened to have a high regard, probably television oriented, regard for shrinks.
To create evidence the doctor videotaped several sessions of children responding to the attention-getting deduction. The RO bought the evidence and allowed half of the huge amount the client claimed.
This was a big win for a client who lived an extremely expensive lifestyle and never had any money in his pocket for lunch.
* Phillip B Chute is an Enrolled Agent, tested, licensed, and appointed by the IRS directly. He has prepared or supervised over 25,000 tax returns over 30 years.