Tax Guru – Ker$tetter Letter

Tax Reform: Now or Never

Q:

Subject: Amended returns causing an Audit

Hello Kerry,

Fellow CPA here from CA.  Earlier in the year you mentioned anecdotal evidence of increased audits for amended returns.  I searched through the last few months of posts and didn’t see any more information.  Is there any new news? 

I have a new client that would benefit to the tune of $2-3k if I amend a prior self-prepared 1040, but I want him to be aware of the potential risks…..

A:

In other words, is the coast clear yet? 

Honestly, I don’t know if it is because I haven’t prepared any amended tax returns since this IRS program came to light.  This has cost a number of clients several thousands of dollars in lost refunds; but we figured that was better than having to undergo the time consuming process of a full blown IRS audit.  It is quite a dilemma. 

I have yet to hear from IRS personnel that this policy has been dropped; but I will make some low key inquiries on this when I next speak with them. 

We would all be very interested in hearing from other practitioners around the country as to their recent experiences with amended returns with refunds over $5,000.  Hopefully some will write in and let us know if their clients were able to actually receive those refunds without an audit.  Any feedback would be appreciated and quite helpful for those of us who want to know if the water is safe from the IRS sharks.

Kerry Kerstetter

 

Follow-Up:

Kerry,

Thanks for the quick reply.

I know that another CPA in our office had a client file a 2003 1040X with a large (>$10k) refund earlier this year; it has now turned into an audit case. 

However, extrapolating from that incident may not be 100% legitimate. From what I understand, there were plenty of unusual items on both the original and amended return that could’ve triggered/flagged for an audit without the added help of the amendment

My Reply:

Although that may be a coincidence, it doesn’t sound like it.  If that audit was started after the 1040X was filed, and a notice was received from the Service Center that it was being sent to the local field office, it sounds exactly like what happened with my two clients.  The auditors then go nuts on their fishing expedition, trying to find enough things that were not even changed on the 1040X in order to convert that refund into a tax due.

Hopefully, we will receive some input from other tax pros, which I will post on my blog.

Kerry

 

Ohio CPA Dana Stahl has picked up the torch to get to the bottom of the IRS’s “Tax Gap” figures:

Subject: IRS Tax Talk

Mr Guru – I’ve been participating in an IRS “Tax Talk” today.  One presenter mentioned that “Tax Gap” study from a couple of months ago, where IRS determined there is an over $300 billion tax gap in taxes that should be collected vs taxes actually collected.  The presenter stated IRS examined over 46,000 1040’s from 2001 & then came up with their findings.  I asked the presenter if there was someplace that I could look at this study in more detail.  I didn’t go into our theory that these type of studies with their conclusions are merely WAGs.  It will be interesting to see if there is actually a way to review these studies & their conclusions.  I’ll let you know.

…the presenter asked me to email her my question and then she would “get back to me”.  I’ll be waiting anxiously!

DS, CPA

I wrote back:

Dana:

I would be very interested in seeing what documentation they provide you.  I doubt that it will be much more reliable than what I found several years ago when I spent a lot of time trying to track down the actual data behind one of those IRS press releases about the tax gap.  I followed the chain of command all the way into IRS headquarters in DC, where they finally admitted that they made the numbers up.

How studying a certain number of tax returns to determine the tax gap makes sense is something I don’t understand, since the main component of the mysterious tax gap is supposed to be people who don’t even file tax returns. 

They don’t even have the decency to admit that they really have no way of knowing the size of the underground economy because such measurements are by definition impossible to make; so they persist with the pretense of knowing exactly how large the tax gap amounts are, with the implication that they could zero out that gap if they were only given enough money and power.

As always, it’s nothing more than a propaganda ploy that IRS uses to convince our rulers and the public to give them more money and power.  It’s just one more (of many) indications of the lack of true journalistic skills nowadays that the mainstream media just continue to report the IRS’s tax gap numbers as gospel without the least bit of investigation into their source, as you and I are doing.

Thanks for keeping me in the loop on this.

Kerry

 

Q:

Subject: We have two homes and…

we want to get married.  His home has 400,000 equity and mine has 500,000.  We were going to sell mine that will hit two years in March.  If we got married in January and sold in March…could he qualify with me as this being our primary res.? And we would move into his. OR does he have to live here with me to qualify?

A:

You will only qualify for a $250,000 exclusion.  Your example sounds just like the following from the IRS website:
 

Example 1 ­ one spouse sells a home.

Emily sells her home in June 2004. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2004.

Basically, the only way to increase that exclusion above $250,000 would be to add your fiance’s name to the title and have him occupy it as his primary residence.  It’s worth $342.47 of tax free gain for each day that he meets the ownership and use test.

What you really need to do is make a thorough and complete calculation of the cost basis of your home so that you can keep your gain to the lowest amount possible.  The amount of equity you may have in the home is a completely different number than your cost basis or your potential profit.  If you haven’t been keeping track of how much you have invested in the home, you need to get started reconstructing that ASAP.  Be sure to include the costs of any appliances, furnishings and fixtures that you will be including  as part of your home sale.

And most important, work with a tax pro who understands how to minimize the taxation of home sales. 

Good luck.

Kerry Kerstetter