Hi,
The IRS closed about half a million Audits last year.
But it closed 987,460 Automated Underreporter cases – almost double that number.
What is the difference between an audit and an underreporter case?
Simple: 4.47 billion information returns, such as 1099-NECs, get matched against tax return filings by machine. Anytime there is a mismatch, the machine generates an underreporter notice. These are a simple fix if you know what you’re doing.
Audits, however, require more work, and there are four common items that can cause one:
- Common “TikTok” Tax deductions – 100% writeoff of luxury vehicle, vacation, etc.
- Rental real estate losses claimed against wage income without qualifying for real estate professional status
- Sustained Schedule C losses, where the IRS argues the activity was never a business at all
- One single massive expense item that stands out on your P&L versus other similar individuals in the same industry
Most of it is preventable. Reconcile every 1099 and K-1 against your return before you file.
Check the cost basis on any stock sale – brokers are required to report it without adjustments, which is how people end up paying tax twice on the same dollars.
If you’re already being audited, start by working out what you actually received. A CP2000 is not an audit – it’s an automated matching notice and it’s answered differently. A math error notice, CP11 or CP12, is different again and carries its own 60 day window. A Letter 566 is a correspondence exam, and a Letter 2205-A means a field agent.
Then four rules:
- Don’t call the examiner yourself. Under section 7521, saying you want to consult a representative stops the interview. File Form 2848 to bring in your accountant.
- Answer only what’s asked. Volunteering for other years or other accounts is how a narrow exam becomes a wide one.
- Never recreate a document to look contemporaneous. That turns a 20% accuracy penalty into a 75% fraud penalty and can trigger a criminal referral. It’s the worst thing anyone does under pressure.
- Do not automatically elect to go to Tax Court – this makes defense of simple cases far more expensive. Most cases are simple.
No two of these situations look the same. A deduction that is completely defensible for one person is a flag on another.
What working with us looks like:
- One hour with a senior advisor, not a sales call
- We review your last three filed returns, any IRS correspondence you have received, and the information forms that should have been filed
- You leave with a written list of where your exposure actually sits and what documentation you would need if a notice arrived
If you have received a letter – please respond with a deadline of the letter response. If you have questions regarding minimizing audit risk – please respond “Have Questions” and we’ll schedule a free 15 minute call with our senior tax advisor to map out where your exposure sits and what a plan would look like from here, as we still have a few spots for August.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com