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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Owner of a CPA firm
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The IRS is requesting documentation for a deduction of unreimbursed

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The IRS is requesting documentation for a deduction of unreimbursed business expenses. While I believe the deduction was legitimate, I have no direct documentation. Its amount is not high and I would rather just pay the extra tax than get involved in a lengthy project to document it. My question is how should the request be answered so as to minimize the chance that they will also look at past years, in which I took the same deduction. How can I improve my chances to have it restricted to 2009 taxes?

There is a general three year period of limitations, so for something minor like this, the IRS cannot go back past three years. The IRS has to request the prior years' information and/or audit you to go about getting that money.

 

Your defense for any year, past or present, is going to be your documentation (the tax code has documentation requirements in general). Without documenting and saving your general information for three years, you are typically leaving yourself exposed to an extent. Paying the current year amount is conservative compared to fighting it, and I have some doubt as to what the IRS would do, but whether you pay this year or not, each year (transaction even) is going to basically stand alone*.

 

*When settling with the IRS, documenting any year's acceptance or rejection of a treatment can have implications as to future/prior treatments, yes... If there are 10 things wrong, 'we' settle on 5, well then you better believe I continue right on with the other 5 things having passed audit the first time, for example... the battles you lose though, you do tend to 'lose' under audit going forward, but only "potentially" going backwards (The IRS agent can go back three years per above).

 

Going forward, I presume this will not be an issue because you will keep proper documentation. Let me know if there is something more I can clarify though.

 

Good luck!!

 

Thank you for your question.

Customer: replied 6 years ago.
Thank you for your prompt reply - and the info on the 3 yr general limitation and basically losing the right on future audits are useful. I do want to just pay for 2009, rather than fight it further, as you note. So the concept is good, but please just clarify the nuts and bolts of doing it - should I just not reply and assume they will recalculate my tax and bill me (seems risky to me), or should I recalculate myself and send it in as part of the reply, or should I file an amended return? Or some other way? Basically how do I go about paying the tax for 2009 to close it out? Please just clarify how I should approach this, and otherwise I am well satisfied with your quick and articulate reply.

You should always respond to a notice like this, generally speaking (The IRS has this nasty habit of assuming that no response implies guilt, yes).

 

If (1) you are going to amend your tax return (2) you are going to pay the tax (3) you want to do the calculations yourself, and (4) this is the only item in question from the IRS (ie... don't do this if you are under audit and there is anything else currently in question), then you can recalculate your tax return accordingly and mark it amended along with your Form 1040X, and file the amended return according to the 1040X instructions.

 

Take a duplicate copy of your now filed 1040X, mark it as "Attachment to Notice XXX" from the IRS, and include it as an attachment to your written notice response from above. That means, you will respond to the IRS notice above with (1) Your written response with reference to the notice and explanation that you filed an amended return to pay the tax, (2) a copy of the amended return marked amended as above, and (3) a copy of the notice itself (see notice instructions).

 

The filing of your tax return will take care of the issue directly. Your response to the notice will inform the IRS that you have already agreed with 'them' and taken appropriate steps to correct the issue on your own (what a responsible taxpayer!!).

 

Thank you again.

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