Author Topic: Giant refunds and the likelihood of being audited?  (Read 1621 times)

rothwem

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Giant refunds and the likelihood of being audited?
« on: February 17, 2017, 10:29:41 AM »
Alright guys, its that time of year again.  This will be the third year in a row that I'll be getting a giant refund.  It won't be the $6000 that I got last year, but it'll be in the mid-$3000 range, which is about what I got the year before last. 

I'm able to write a lot of things off because of the rental property I own that was purchased in "barely standing" condition. New HVAC, wiring. roof, kitchen, bathroom, not to mention the gallons of paint, drywall mud and lumber that I've thrown at it.  I didn't want to go into debt to fix it up, so I've been slowly doing the improvements and repairs as my funds allow, but that means they've been spread over several years, and that means I'm going to have 3 giant tax returns in a year. 

I'd really like to avoid getting audited, especially since I did an awful job keeping track of receipts and invoices the first year I owned the house.  Anything I can do?  Any deductions I should definitely NOT take, even if they're valid? 

FrugalGrad

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Re: Giant refunds and the likelihood of being audited?
« Reply #1 on: February 17, 2017, 11:14:33 AM »
Make sure the "repairs" you are doing are actually repairs, and not expenditures that should be capitalized.
Length of time to complete a project does not determine whether or not it should be capitalized - scope of work does.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

rothwem

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Re: Giant refunds and the likelihood of being audited?
« Reply #2 on: February 17, 2017, 11:24:45 AM »
Make sure the "repairs" you are doing are actually repairs, and not expenditures that should be capitalized.
Length of time to complete a project does not determine whether or not it should be capitalized - scope of work does.

Correct.  I'm aware of the difference. I've capitalized quite a bit, probably close to 30k in the past 3 years, but the repairs and maintenance costs have been pretty big too. 

FrugalGrad

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Re: Giant refunds and the likelihood of being audited?
« Reply #3 on: February 17, 2017, 11:30:12 AM »
Then I would say take all the deductions you are entitled to. Unless you're feeling altruistic, no need to let the government keep more of your money than they need to.
It will probably reverse in the future when the repairs are all done, your depreciable base is fairly low, and your rent is coming in, so take advantage of it now.
I'm also assuming the house is currently rented. If it has not yet been rented, then you should not have deducted anything yet.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

rothwem

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Re: Giant refunds and the likelihood of being audited?
« Reply #4 on: February 17, 2017, 12:11:28 PM »
Then I would say take all the deductions you are entitled to. Unless you're feeling altruistic, no need to let the government keep more of your money than they need to.
It will probably reverse in the future when the repairs are all done, your depreciable base is fairly low, and your rent is coming in, so take advantage of it now.
I'm also assuming the house is currently rented. If it has not yet been rented, then you should not have deducted anything yet.

Fair enough.  And yes, its being rented. 

SeattleCPA

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Re: Giant refunds and the likelihood of being audited?
« Reply #5 on: February 20, 2017, 05:36:29 PM »
The refund sizes you're talking about don't trigger audits.

BTW, if you ask for (at the same time) several high five or low six figure refunds, that'll maybe trigger an audit in my experience. Maybe.

But you shouldn't worry about this.

Interestingly, if you request a $2M refund, the IRS needs to get congressional approval before they issue the refund. Because of this wrinkle, tax returns that include a $2M refund always get audited as I understand it. (Every refund situation I've been involved in where there's a $2M refund or close to that triggered an audit.)

Cpa Cat

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Re: Giant refunds and the likelihood of being audited?
« Reply #6 on: February 20, 2017, 06:46:15 PM »
It's not really the size of the refund (although I don't have clients with $2M refunds!!) - it's more about the source. If you get a $5,000 refund because you overwithheld from your W-2 job, no big deal. If you're getting a $5,000 because your self-employment income or rental losses landed just where they needed to max out your EITC, then the likelihood rises.

Rental losses don't seem to be a big trigger - they have various rules to limit them and most rental properties have losses. Unless you put your house flipping business on Schedule C - then it becomes a decent audit risk.

I generally tell my clients - don't worry about audits. Worry about documentation. If your rental property did get audited, all you'd need to do would be to produce the receipts and proof of payment for your repairs/reno. So keep good records.

cchrissyy

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Re: Giant refunds and the likelihood of being audited?
« Reply #7 on: February 20, 2017, 08:19:16 PM »
Don't worry, four figure refunds aren't that unusual.

rothwem

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Re: Giant refunds and the likelihood of being audited?
« Reply #8 on: February 21, 2017, 06:03:38 AM »

I generally tell my clients - don't worry about audits. Worry about documentation. If your rental property did get audited, all you'd need to do would be to produce the receipts and proof of payment for your repairs/reno. So keep good records.

Ha yea. I did an awful job with receipts in 2014, but I made a change in 2015 where I either used a separate business account or a dedicated credit card to do all rental house stuff. So I'm good for 2015 and 2016, but 2014...rut roh...luckily, most of the deductions in 2014 come from buying the actual house, and I have all of those records.

It's good to know that I'm a still a small fish though. I don't plan on racking up any 2 million dollar returns any time soon.


SeattleCPA

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Re: Giant refunds and the likelihood of being audited?
« Reply #9 on: February 21, 2017, 02:10:25 PM »
I generally tell my clients - don't worry about audits. Worry about documentation. If your rental property did get audited, all you'd need to do would be to produce the receipts and proof of payment for your repairs/reno. So keep good records.

Great point.

And to add a little more color to this issue, if you have good documentation? Gosh, you basically won't lose an audit.

If you have bad documentation? Don't expect a good outcome.

Drifterrider

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Re: Giant refunds and the likelihood of being audited?
« Reply #10 on: February 23, 2017, 06:01:23 AM »
Alright guys, its that time of year again.  This will be the third year in a row that I'll be getting a giant refund.  It won't be the $6000 that I got last year, but it'll be in the mid-$3000 range, which is about what I got the year before last. 

I'm able to write a lot of things off because of the rental property I own that was purchased in "barely standing" condition. New HVAC, wiring. roof, kitchen, bathroom, not to mention the gallons of paint, drywall mud and lumber that I've thrown at it.  I didn't want to go into debt to fix it up, so I've been slowly doing the improvements and repairs as my funds allow, but that means they've been spread over several years, and that means I'm going to have 3 giant tax returns in a year. 

I'd really like to avoid getting audited, especially since I did an awful job keeping track of receipts and invoices the first year I owned the house.  Anything I can do?  Any deductions I should definitely NOT take, even if they're valid?

Nope.  NEVER be afraid of government.  Keep your paperwork honest and press on.  Take every legitimate deduction you can take.

I don't consider $3,000 refunded to be a large refund (I don't get one but in the grand scheme I bet a lot of people do).  Many people continue to loan their money to government interest free then believe they have received a "windfall" at tax time.

SeattleCPA

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Re: Giant refunds and the likelihood of being audited?
« Reply #11 on: February 24, 2017, 08:03:53 AM »
Nope.  NEVER be afraid of government.  Keep your paperwork honest and press on.  Take every legitimate deduction you can take.


Totally, total agree with this point.

P.S. I'm working on two field audits this week where IRS agents are in our CPA firm offices. Just mention that to provide additional context for my hearty endorsement of drifterrider's comment.

With This Herring

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Re: Giant refunds and the likelihood of being audited?
« Reply #12 on: February 24, 2017, 08:22:04 AM »

I generally tell my clients - don't worry about audits. Worry about documentation. If your rental property did get audited, all you'd need to do would be to produce the receipts and proof of payment for your repairs/reno. So keep good records.

Ha yea. I did an awful job with receipts in 2014, but I made a change in 2015 where I either used a separate business account or a dedicated credit card to do all rental house stuff. So I'm good for 2015 and 2016, but 2014...rut roh...luckily, most of the deductions in 2014 come from buying the actual house, and I have all of those records.

It's good to know that I'm a still a small fish though. I don't plan on racking up any 2 million dollar returns any time soon.

You know you had those prior year expenses, even if you lost receipts.  If I were you, I would go through those old credit card charges that you know were related to your rental renovations, get exact dates, times, vendors, and credit card numbers used, and go to the vendors to see if they can run you duplicate receipts.  A lot of large retail businesses in my area (not necessarily home improvement, but grocery stores and that ilk) have the means of finding old purchase receipts in their systems on-site at their branches.  If you can get even a few vendors to reprint copies of old receipts for you, you are ahead in recreating your documentation.  The sooner the better, though, as some may not retain access to old receipts for more than a few years.

When you said "giant refunds," I was expecting the $200K refunds (well, usually applied to next year) that I've seen self-employed doctors get because they made too many estimated payments ("Oh, CPA, we forgot whether we made the January estimate in December, so we paid it again in January just to be safe!") or something else botched our calcs, not $3K-$6K.  :)   And, wow, a $2M refund?!  What a novelty to deal with a client on that scale!
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rothwem

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Re: Giant refunds and the likelihood of being audited?
« Reply #13 on: February 24, 2017, 08:28:41 AM »

I generally tell my clients - don't worry about audits. Worry about documentation. If your rental property did get audited, all you'd need to do would be to produce the receipts and proof of payment for your repairs/reno. So keep good records.

Ha yea. I did an awful job with receipts in 2014, but I made a change in 2015 where I either used a separate business account or a dedicated credit card to do all rental house stuff. So I'm good for 2015 and 2016, but 2014...rut roh...luckily, most of the deductions in 2014 come from buying the actual house, and I have all of those records.

It's good to know that I'm a still a small fish though. I don't plan on racking up any 2 million dollar returns any time soon.

You know you had those prior year expenses, even if you lost receipts.  If I were you, I would go through those old credit card charges that you know were related to your rental renovations, get exact dates, times, vendors, and credit card numbers used, and go to the vendors to see if they can run you duplicate receipts.  A lot of large retail businesses in my area (not necessarily home improvement, but grocery stores and that ilk) have the means of finding old purchase receipts in their systems on-site at their branches.  If you can get even a few vendors to reprint copies of old receipts for you, you are ahead in recreating your documentation.  The sooner the better, though, as some may not retain access to old receipts for more than a few years.

When you said "giant refunds," I was expecting the $200K refunds (well, usually applied to next year) that I've seen self-employed doctors get because they made too many estimated payments ("Oh, CPA, we forgot whether we made the January estimate in December, so we paid it again in January just to be safe!") or something else botched our calcs, not $3K-$6K.  :)   And, wow, a $2M refund?!  What a novelty to deal with a client on that scale!

Yea, I guess $3-6k seems like a lot, since I'd been trying to make it zero before buying the house.

Paul der Krake

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Re: Giant refunds and the likelihood of being audited?
« Reply #14 on: February 24, 2017, 08:32:46 AM »
The average refund is already pushing $3,000.

Form W-4 is designed to overwithhold, because taxpayers spend every dollar they get their hands on and there would be riots if they had to "come up with money" each year.

You have nothing to fear.

Livingthedream55

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Re: Giant refunds and the likelihood of being audited?
« Reply #15 on: March 09, 2017, 11:00:26 AM »
The refund sizes you're talking about don't trigger audits.


This! I got a $1 refund from my state and they just audited me!   : 0 )  I called the state Dept. Of Revenue's audit division and they said it was generated randomly.



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Re: Giant refunds and the likelihood of being audited?
« Reply #16 on: March 10, 2017, 10:01:18 AM »
Step one I advise is start keeping good records.  I am sure there are apps for rental property owners that will make this easy.

Step two is don't deduct anything that is clearly illegal or questionable.  If they are expenses related to the house, deduct them.  They are legitimate. 

The size of your refund is irrelevant, the government would love everyone to over pay, and that won't flag you for an audit. 
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