Tax Guru – Ker$tetter Letter

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Archive for January 16th, 2006

Dealing With Auditors

Posted by taxguru on January 16, 2006


Subject: Any advice?

I have just found our website after months of IRS torture. We are being audited for the year 2003 and it’s been going on since August. My husband is a small business owner (LLC construction company) and I worked as a physician assistant in 2003. I am now in medical school. Anyway, we are being given hell over my unreimbursed employee business expenses. The majority of these expenses are for 2 medical conferences and for a Palm Personal Digital Assistant. I have receipts, credit cards statements, and my own records as kept using the It’s Deductible program. However, the IRS auditor insists that I must produce documents from the employer explaining the reimbursement policy of Tulane and documents showing my requests were denied. The problem is that I had been told prior to even requesting reimbursement that there was no more money in the department for reimbursement. Why would I ask my employer for money I had already been told would not be reimbursed? Also, concerning the Palm, they say that it is only deductible if it was “required” by my employer. Our CPA has really gone to bat for us and has argued tirelessly with no success. Today, my husband and our CPA had a conference call with the auditor and her supervisor who is in Houston . (We live in Pineville, LA—4 hours from Houston.) He backed the auditor on everything. My former supervisor and chief of the department had written me a letter explaining that these expenses were not reimbursed and that a Palm PDA was ordinary and necessary. However, the IRS agents dismissed that saying that my former supervisor was a “personal friend” and couldn’t offer information. They said I had to get something from Tulane’s Financial Office. (I was employed by Tulane University School of Medicine in New Orleans. I’m sure you can see the problem with that.) However, I have studied all the IRS documents thoroughly and I disagree with their position. I don’t see anything that says I must keep records of my previous employers reimbursement policies. All I can see is that I must keep accurate, complete receipts which I have done. The agent has already been through all our bank statements thoroughly so she knows good and well I was not reimbursed. Well, I don’t mean to go on and on but we are very worn out over this. She told our CPA today that she now intends to dig into 2004 even though she told him at their last meeting that she wasn’t going to. We feel like they are just fishing and angry because we are fighting them. Please offer any insight you can.




With IRS audits, there is an element of luck in regard to whether you get an auditor with some smarts or an imbecile.  It sounds as if you got the latter.

From the way you described it, you have provided much more substantiation for the legitimacy of the unreimbursed employee expenses than it normally takes.  The auditor is being an unreasonable jerk.

I have had plenty of experiences just like yours.  I long ago realized that asking the audit supervisor or manager for help is a big waste of time.  While a case in underway, they always rubber stamp their auditors’ opinions.  I have actually had a number of times where I was speaking with an IRS audit manager about a new case and they admitted that their auditors on previous cases were out of line.  It was obviously too late to have any effect.

In cases like yours, the best thing is to try to close it out at the auditor level ASAP and then take it to Appeals, where the people have more brain power and are required to consider the hazards of litigation.  This means that an Appeals Officer would know that the IRS would be laughed out of Tax Court by insisting that the documentation you proved wasn’t good enough.

Your CPA will have to decide exactly how to end the audit.  One technique I have used in situations like that was to just tell the auditor and his/her manager that we will not be providing any more information to them and they should just go ahead and issue their report.  When the report is issued, your CPA should then submit a formal request to have the case transferred to Appeals. 

Good luck.

Kerry Kerstetter



Thank you so much for your advice. I have forwarded it to my CPA. I think you are right. I want this out of her hands.


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Posted by taxguru on January 16, 2006

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