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Does the IRS ever do an audit that results in refunding

money back to the taxpayer...
Does the IRS ever do an audit that results in refunding money back to the taxpayer AND then taking back any social security credits that might have been earned in error?
It's a long story, but I'm self-employed and trying to earn social security credits. I don't make a whole lot of money working part time. I am probably the exact opposite of most people - I want to pay maximum income tax and minimize my deductible expenses in order to earn as many SS credits as I can.I do a variety of things to earn money and it's possible the IRS could disagree with something I'm claiming as income or an expense. My concern is that I don't want social security credits to be deducted from my account. How likely is it that the IRS would ever reduce a person's taxable income and/or increase expenses, thereby reducing any earned SS credits?I'm trying to play by the rules and I do my best to accurately reflect income and expenses. Is this something I need to be concerned about? I would hate for monthly SS payments to stop (when they start in a few years) because an audit brought me under the required number of credits.
JA: The Accountant will know how to help. Is there anything else the Accountant should be aware of?
Customer: Could I speak to an IRS "enrolled agent"?
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Answered in 50 minutes by:
11/8/2017
socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 39,473
Experience: Retired (mostly)
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Hello,

The answer to your question is, "yes," it's possible for your annual self-employment or Social Security (SS) earnings to be reduced or increased based upon an IRS audit (or, upon the taxpayer's filing a form 1040X amended return). The IRS sends each taxpayer's earnings for Social Security to the Social Security Administration (SSA) each year. If the amount changes, the IRS sends an updated amount. A taxpayer also can challenge the earnings for any year, if there appears to be an error. The process of updating the SSA is generally complete by October after the April 15-17 filing date. So, it makes no sense to review your SS earnings until November, because they may change.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer (click 3, 4 or 5 stars) -- otherwise, Justanswer retains your entire payment, and I receive nothing for my efforts in your behalf. Note: If you cannot find the rating button on your webpage, please just type in your rating in a response to this note, and customer service will apply the rating for you.

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Customer reply replied 1 month ago
Thanks. The following is what I was leading up to. I need pretty extensive tax planning advice as I'm concerned that lack of clarity on the below situations could result in working in various ways that would not earn me social security credits when I thought they would.I am a former federal employee. We do not pay into social security and do not earn credits. However, before working for the federal government, I worked in the private sector and earned 30 of the minimum 40 credits required to earn benefits. I am now trying to earn the last remaining ten credits. I have these questions:1. I'm currently working now and then as an independent contractor moving company vehicles around the country, and it often involves air fares, hotels, etc. As we know, expenses offset income, and my expenses mean I have to earn more income to earn SS credits. If I pay for my expenses (hotels, gas, airline tickets, etc.) with frequent flier miles, gift cards, hotel point awards, etc., do I still report the value as an expense, or is the expense zero? So let's say, for example, I pay for my hotel expense with points (no cost to me), or I pay for my flight to NY to drive a car to LA with frequent flier miles (no cost to me). Is my expense zero for those transactions?2. I sometimes participate in focus groups or act as an extra on TV shows and movies. For those, I earn on average $75-200. They typically don't send me 1099s. The focus groups sometimes call their payment "honorarium." Let's assume I don't have to report some or any of that income. My question is this: CAN I report it as income? - because keep in mind, I want to maximize my taxable income in order to earn SS credits.3. Can I earn SS credits by selling items on eBay? Example: I spend $100 at yard sales or thrift shops and sell those items on eBay for $1000. Is the $900 profit reportable income that would earn me SS credits?The following questions relate to bartering as a way to earn reportable "income":4. I have volunteered to teach English in Europe to business executives in exchange for room and board. I plan to report the value of of the room and board in 2017 as income, according to my understanding of the rules regarding bartering. I've read IRS's information about bartering, and I'm not totally clear on their distinctions about "vacations" and "hobbies" as they relate to volunteering and bartering. In my case, it was not a hobby. I have been paid in the past for teaching English, and I would not volunteer to do it if not for the room and board. Also, the volunteer experience was combined with a "vacation" - two weeks touring Europe, and a cruise from Barcelona, after the volunteering, so I don't think I should consider the airfare to and from Europe an expense.5. Do you have any reason to believe I should not report the value of room and board in #4 above as income to earn SS credits? The IRS gives example of bartering between businesses (but I don't think that's meant to imply bartering can only occur between businesses). They give an example of a plumber bartering with a dentist, for instance.6. What sort of proof/documentation do I need to establish the value of the room and board in #4 above?7. Does the fact the bartering to teach English took place outside the United States present any tax/SS issues?8. I am interested in volunteering to do administrative work at spiritual retreat centers in the U.S. in 2018. Let's say the volunteer work would entitle me to receive benefits at these centers worth $2,000, and this $2,000 is the value of the administrative work I performed plus room and board. Let's say I then enroll in one of their weeklong activities that cost $2100, for which I would only have to pay $100 (the difference between the $2100 cost and the $2000 compensation). Would the $2,000 be reportable income for earning SS credits?9. There is one retreat center that offers a 50% discount off its fees in exchange for volunteering to do administrative work. Let's say they normally charge $1,000 for one of their weeklong events, but sell it to me for $500 in exchange for my volunteer work. Would the other $500 that I wouldn't have to pay be reportable income for earning SS credits?10. Would volunteering to be an usher in a performing art center in exchange for seeing theatrical productions for free qualify as bartering and would the value of the free shows be reportable as income?I realize these are a lot of questions and special expertise might be required. If this board is not the appropriate place for such questions, I am open to referrals. I'm not interested in a phone call. I need answers in writing so I can refer to them later. Thanks.

1. Not an expense.

2. Yes, you can report the income. A 1099-Misc is only required when a taxpayer receives $600 or more in payments in the course of trade or business during the calendar year.

3. If you regularly buy and sell goods for a profit, then your income is earned and reportable as self employment income.

4. A hobby business is one where there is no "profit motive." The IRS presumes that a taxpayer must earn a profit from a particular business in at least 3 out of every 5 years -- otherwise, the IRS will declare the business a hobby, and not permit any deductions for losses. However, profits are always taxable, whether a business is a hobby or not.

5. I would report this as income.

6. Ask for a receipt from the "employer." If you can't get one, then use Trivago, Expedia, etc., to determine fair market value for the room. Take pictures of menus, if you're eating in restaurants, so as to capture the prices of your meals. When in doubt, make a good faith estimate. The IRS wants your money, so you won't get any grief if you increase your earnings.

7. If you were an employee, then your Social Security earnings might be subject to a totalization treaty between the USA and the nation in which you are teach. But, as you're self employed, it's all self employment income -- so, no issues, in my opinion.

8. If you are being compensated for your work, then you are not a "volunteer." You are either an independent contractor or an employee. If you're receiving benefits of fair value, then that value is income, and the income is reportable (though, to be sure, very few taxpayers would ordinarily report the benefits while "volunteering." They would claim that the benefits were "de minimis" and not taxable income.

9. See #8, above.

10. See #8, above.

I seriously doubt that you're going to get grief from the IRS over reporting additional taxable income. Uncle Sam is simply not in the business of turning away taxpayer payments. No IRS agents are hired to try to reduce taxpayer reported income. That would be a non sequitur.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer (click 3, 4 or 5 stars) -- otherwise, Justanswer retains your entire payment, and I receive nothing for my efforts in your behalf. Note: If you cannot find the rating button on your webpage, please just type in your rating in a response to this note, and customer service will apply the rating for you.

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Hello again,

I see that you have reviewed my answer, but that you have not provided a rating. Do you need any further clarification concerning my answer, or is everything satisfactory?

If you need further clarification, concerning this matter, please feel free to ask. If not, I would greatly appreciate a positive feedback rating for my answer (click 3, 4 or 5 stars) – otherwise, Justanswer retains your entire payment, and I receive nothing for my efforts in your behalf. Note: If you cannot find the rating button on your webpage, please just type in your rating in a response to this note, and customer service will apply the rating for you.

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Customer reply replied 1 month ago
Wow. Thanks for answering all my questions! Btw, I asked a tax pro question 10 not long ago and she said it would not be reportable income. It’s these differences of opinion that make me uncomfortable about how to proceed, and why I’m concerned that an audit could cancel, not just reduce, my SS benefits, because I’ll be coming in with only the minimum 40 credits. (No I’d rather not earn an extra credit or two as a “buffer.” That’s a lot of work for a retiree getting up there in age.) So you think the risk of an audit where my income would be reduced or expenses increased would be very slim?

Your Schedule C won't show where the income is coming from, because all that's reported is "gross receipts from sales." By example, if I have a client with $100,000 in Schedule C gross income, but no 1099-Misc from any individual vendor, the IRS doesn't audit the client. In fact, this is pretty typical for a lawyer or accountant, because the clients are overwhelmingly individuals and they are not engaged in trade or business, so they have no legal obligation to send a 1099-Misc, regardless of the amount paid.

Also, the Internal Revenue Code provides that eBay and other payment processors don't have to send a 1099-Misc unless a user has at least 200 transactions and $20,000.00 in gross receipts during the calendar year. So, there are all sorts of taxpayers out there with thousands in income and few if any 1099-Misc forms to back up their income.

I can't promise that you won't get audited, but my experience suggests that your trying to do something that the IRS simply has no interest in tracking. There's no money to be made by the federal government in auditing taxpayers who report more income than they actually earn.

That said, I wouldn't just make up income, either. You need a good faith reason for reporting the income -- because, at the bottom of every tax return, the taxpayer signs under "penalty of perjury." Which, legally means, that a statement which is literally true but nevertheless deceptive is not perjury -- whereas a statement that is partially or completely false but not deceptive at all is perjury.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer (click 3, 4 or 5 stars) -- otherwise, Justanswer retains your entire payment, and I receive nothing for my efforts in your behalf. Note: If you cannot find the rating button on your webpage, please just type in your rating in a response to this note, and customer service will apply the rating for you.

Thanks again for using Justanswer!

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