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Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 46533
Experience:  29 years of experience as a tax, real estate, and business attorney.
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received a tax audit from the IRS by mail regarding my 2010

Customer Question

received a tax audit from the IRS by mail regarding my 2010 taxes, more specifically the schedule C which shows business losses. I have a home based travel agent business via the internet ( I am an engineer but the travel business is part time. The IRS requested that I show receipts for my travel expenses along with dates and purpose, as well as a vehicle log. The losses total over 2000 dollars ( travel to Europe and south America in the spirit of contacting new clients). I presented the IRS with an explanation of the vehicle log as well as car maintenance receipts as requested indicating the mileage throughout the year. I traveled 40000 miles that year and indicated that 25 percent where used for business. In addition as requested , I provided the IRS with a excel spread sheet indicating the purpose of my trips with dates and expenses, itemized as hotel, air, food entertainment etc as well as 90 percent of all receipts via credit card statements. Furthermore, I provided the IRS with business cards showing my address, receipt for domain name as well as the monthly fee of 50 per month for maintaining the website. The IRS has now rejected all of the above referenced expenses, when the law clearly allow for such deduction for travel agents. The IRS has indicated that I owe them 12000 in taxes and penalties. In addition, they have conculeded that I can not claim business losses for 5 consecitive years ( I have shown losses in 2007,208, 2009, 2010, 2012), although I am operating a home based travel agency. Travel agent business is to travel and rarely make a profit I am inquiring what are my options, should I seek a CPA or a Tax attorney and fight the IRS or do you have any suggestions.
Submitted: 1 year ago.
Category: Tax
Expert:  Richard replied 1 year ago.
Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good afternoon. Can you tell me at what level this was decided at the IRS? Was this simply the assessment of your original audit agent? Thanks.


Customer: replied 1 year ago.


Yes, it is the response of the intial aduti. I have provided the receipts and documentation requested in the initial audit. Now the examiner has determined that because I have shown losses in 2007,2008,2009 2010, 2011 and 2012 ( Tax year in question is 2010). Based on this assumption that I am not enganging in attempting to make a profit. But the rules governing travel agents are different becase travel agents business it to travel. I am an engineer who has a home based internet travel agents

Expert:  Richard replied 1 year ago.
Thanks so much for your reply. This is pretty standard at the initial audit level. Those agents are the least experienced agents and are programmed to basically deny everything that is anything other than absolutely black and white. It's when you appeal the initial agents determination that these things get settled. For your appeal, I would recommend you engage either a CPA experienced in audit appeals or a tax attorney to help you. They have experience in dealing with audits and will get you to the finish line far more quickly than you would do and likely be more successful because the agents at the appellate level know the CPA or attorney knows the tax law and the agent won't be able to intimidate them like they can an individual taxpayer. Your business is in one of those gray areas....hobby versus business....and you'll be more likely to successfully argue your facts with a professional than doing it yourself. To fully understand the hobby versus business viewpoint of the IRS, you might take a look at the following link: http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions



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Customer: replied 1 year ago.

 


Based on the information provided, If I challenge the IRS, will they audit other tax years once I appeal the decision. Based on your expertise and opinion is this an avenue I should seek, by challenging the IRS.

Expert:  Richard replied 1 year ago.
Thanks so much for following up. It's not likely they will expand the audit. And, yes, I would definitely challenge this....I have handled a number of audits on this same issue and have been successful on appeal when denied at the initial level. In fact, in almost every instance on this issue and other issues, the standard operating procedure is that the initial agent denies everything and then we prevail on appeal where you encounter more reasonable and experienced agent. The initial agents do this for the same reason insurance companies initially deny claims...because most people just accept the initial decision. You should not, in my opinion.
Customer: replied 1 year ago.

 


I live in Florida. I am seeking a seasoned tax audit professional. Are your service available or can you endorse a colleague. In addition, what are the reasonable fee for a incident with these particulars.


 

Expert:  Richard replied 1 year ago.
Thanks for your reply. Unfortunately, under my terms of service with JustAnswer, I'm not allowed to represent you directly. Also, I'm not allowed to make a specific recommendation, but I can give you direction. You would want to either contact the Florida state bar association, the AICPA, or your nearest law school or business school for a referral of either a CPA or lawyer . I prefer either the law school or business school route because they take great pride in their graduates and will take a more personal interest in making sure your referral is a good one because it will be a reflection of the school. You should be able to find competent representation for $100-$200/hour for a CPA and $200-$250/hour for a tax attorney.
Customer: replied 1 year ago.

Thanks for your help.

Expert:  Richard replied 1 year ago.
You're very welcome...it's been my pleasure! If you don't mind, please keep me apprised of your appeal! Thanks!
Customer: replied 1 year ago.


Shall do...

Expert:  Richard replied 1 year ago.
Thank you...I look forward to hearing from you. Take care!
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 46533
Experience: 29 years of experience as a tax, real estate, and business attorney.
Richard and 8 other Tax Specialists are ready to help you
Customer: replied 1 year ago.


I have few more question. Can the IRS go back and disallow the schedule C from previous years before 2010 (2007, 2008, 2009 and 2010). I have an attorney who is trying to convice me of this. How many years can the IRS go back and audit a home business.

Expert:  Richard replied 1 year ago.
Hi there. Under the IRS audit guidelines (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRS-Audit-FAQs):

"Generally, the IRS can include returns filed within the last three years in an audit. Additional years can be added if a substantial error is identified. Generally, if a substantial error is identified, the IRS will not go back more than the last six years.
The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly most audits will be of returns filed within the last two years.
If an audit is for an older year, you may be requested to extend the statute of limitations for assessment of your tax return. The statute of limitations limits the time allowed to assess additional tax. The statute of limitations is generally three years after a return is due or was filed, whichever is later. There is also a statute of limitations for making refunds.
If the audit is not resolved and the statute of limitations date is nearing, you may be asked to extend the statute of limitations date. This will allow you additional time to provide further documentation to support your position, request an appeal if you do not agree with the audit results, or to claim a tax refund or credit. It also allows the IRS time to complete the audit and provides time to process the audit results.
You do not have to agree to extend the statute of limitations date. However, if you do not agree, the examiner will be forced to make a determination based upon the information they currently have. Therefore, the examiner may not be able to consider additional adjustments, such as expenses, that could lower the amount of tax due."

Customer: replied 1 year ago.

 


I asked the questions because my attorney (not sure of her experience level is trying to convince me that the IRS will expand the audit. They are only auditing the 2010 schedule C. I have this internet based travel agency since 2007 until now. I have garnered revenue but due to the nature of the business. My losses are more than my profit. My attorney is trying to convince me this is a complex matter, when the IRS is only auditing my schedule C for 2010.

Expert:  Richard replied 1 year ago.
Although the IRS has these options, they are not likely to pursue them. True, it's possible, but your attorney is likely over-reacting. Typically audits such as yours relate only to the specific item that is mentioned and unless they suspect fraud, they don't typically expand it beyond the scope of the initial inquiry. I'm not saying they could not; but, based on my 32 years of experience, they generally do not.
Customer: replied 1 year ago.

I have spoken to a few different legal sources and most of them have told me to settle and are trying to help me establish a payment plan with the IRS and not incur their wrath. I have been told tha the IRS will not allow me to travel at discounted rate and write it off as a business loss. I am truly confused and do not know how to resolve this issue.

Expert:  Richard replied 1 year ago.
I'm sorry for the delay....had a scheduled meeting. If it's not a large amount, and if there are reasons you don't want to open up other areas or other returns to scrutiny, that's good advice. If you have no other issues, there really is little downside to at least taking it to the next level to at least have someone of the appeals level consider it.
Customer: replied 1 year ago.


I have one final question. I conculded to settle with the IRS. What is the likelyhood that they will audit me in 2011 and 2012? You have indicated you do not think they will expand the audit.

Expert:  Richard replied 1 year ago.
Thanks so much for replying. If you have resolved 2010 and they did not ask about 2011 and 2012, I think the chances of you being audited for those years is very small. If they were going to want to address those, they would have asked about it in settling your 2010 audit.

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