We recently had a client hire us for an IRS audit covering tax years 2012 and 2013. The IRS was challenging her business expenses listed on the schedule C, primarily travel, meals and entertainment, as well as mileage and vehicle costs. We definitely had our work cut out for us.
First and foremost the week the client hired us for the IRS audit was also the day before the audit (sometime in the first week of May). The client had already visited with the auditor once and it was a very uncomfortable situation for her. The auditors tend to press fairly hard and push for information they may or may not need. Therefore, we immediately needed to step in and not only buy more time, but also make sure the auditor stuck to the issues at hand.
We secured form 2848 to represent the client in the IRS audit and made sure to send the form along to the IRS Auditor. We also followed up with a phone to call to be sure she received our fax and was aware as to our representation. We had a relatively pleasant conversation with the auditor to start and let her know we needed additional time to secure information relative to the audit. She was agreeable and gave us until June 17th to remit the documentation as well as meet with her face to face to conduct the IRS audit and discuss the issues at hand.
We discussed the situation with our client and she immediately felt relief. We asked her to come up with the documentation listed on the Information Request the IRS sent to her and she began working on the information immediately for the IRS audit. The information small business owners should have on hand and keep with regard to an IRS audit is listed below:
- Mileage logs detailing the trip mileage, why the trip was taken, who you met with, where you met, and details of the meeting
- Calendar logs also help if they list similar information as the mileage log
- Meals and Entertainment is limited to 50% and must list where the meeting took place, what was discussed, and with whom, as well as be accompanied by a receipt
- Travel (such as flights, hotels, rental cars) must have an itinerary showing why the trip was taken, for what business purpose, if there were personal days taken, as well as documented receipts for all expenses matching the dates of the trip
Now, our client did have the majority of this information and this helped significantly with the IRS audit. However, the taxpayer didn’t list any gross income from her work. The IRS was questioning whether or not her business actually fell into the hobby category. We let the IRS know the taxpayer would begin taking expenses up to the amount of her income, or turn a profit if she was going to continue doing the type of work she did (skin care product sales, as well as travel/vacation home sales).
The IRS agreed to allow 50% of all expenses relative to the business. If the IRS didn’t allow any expenses, or potentially opened up additional issues such as a full income tax audit, the taxpayer would have owed closer to $30,000. The IRS audit results came in at just a touch above $4,000.
If you need a professional to fight for your best interests, keep the IRS at bay, and get you the best results possible in relation to an IRS audit please call us immediately at 720-398-6088.