Author Topic: What is the worse case scenario?  (Read 7589 times)

Rekon

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What is the worse case scenario?
« on: December 03, 2014, 08:34:21 PM »
I'm getting audited by the IRS.  They are questioning my deductions.  Here is a little background: I claimed 7k medical, 3k charity and 19k business expenses.  Total 29k in deductions.   I got back a little over 4k (15% of deductions).  I'm trying to reproduce my documents but I didn't keep the best records. 

Anyways, what is the worse case scenario? Is the worse casepay back $4k + 20% penalty?  Or is there something else i'm missing...

« Last Edit: December 03, 2014, 08:36:08 PM by Rekon »

2Birds1Stone

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Re: What is the worse case scenario?
« Reply #1 on: December 03, 2014, 08:49:18 PM »
Worst case? You are walking outside for some yard time and before you go back to your cell you hear "drop your pants and touch your toes, I'm gonna buttah yo bread"

Rekon

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Re: What is the worse case scenario?
« Reply #2 on: December 03, 2014, 08:58:31 PM »
lol i meant how much will i owe back - worse case.

Rage

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Re: What is the worse case scenario?
« Reply #3 on: December 03, 2014, 09:34:15 PM »
I'd say the real worst case scenario here is that a star in our galaxy goes supernova and releases a gamma ray burst that extinguishes all life on earth.

As for this little IRS thing, I'd say the worst case is that they think that you willfully lied on your taxes.  So I would go into this keeping in mind that your intentions at the time you filed your taxes matter a great deal.  Also, lying to a federal employee is a federal crime, so I would suggest 1) not lying and 2) keeping careful notes of your meetings with them so that if there is ever an issue you can say, "well I wrote down in my signed and dated notes that I said X".  This can be the difference between getting your bread buttered and not getting your bread buttered :)

I would advise going over these deductions and revisiting your reasoning and documentation.  I'm not quite sure what happens if you discover that you made a mistake, seems like that would be awkward - "uh yeah, *at the time* I thought I could deduct all of my medical expenses, but I just noticed after you called me that I can only deduct medical expenses that exceed 10% of my AGI...", but nonetheless, I would be prepared to offer a defense of anything goofy. 

Also, I'm guessing those business expenses are what got their attention.

MDM

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Re: What is the worse case scenario?
« Reply #4 on: December 03, 2014, 09:46:58 PM »
One can speculate on all sorts of worst cases involving undeclared income, but if we restrict the downside to your deductions: worst case is they are all disallowed.  You can always take the standard deduction, so if the $29K was the total of your itemized (no state income tax?  no property tax? etc.) deductions you would be back to $6200 for single or $12400 for MFJ (or whatever the rate for the year in question).

Assuming you filed single and the standard deduction was $6000, you would recalculate your return with $23K less in deductions.  How much that changes your tax due depends on the bracket you were in.

Don't know for sure on the penalty.  A little searching finds http://www.irs.gov/pub/irs-pdf/p556.pdf (which you may already have as you mention 20%):
Penalty for erroneous claim for refund. If you claim
an excessive amount of tax refund or credit relating to income
tax (other than a claim relating to the earned income
credit), you may be liable for a penalty of 20% of the
amount that is determined to be excessive. An excessive
amount is the amount of the claim for refund or credit that
is more than the amount of claim allowable for the tax
year. The penalty may be waived if you can show that you
had a reasonable basis for making the claim.

No idea if the various "tax audit defense" companies are worthwhile or not.  It might also be worth checking with a local CPA or tax attorney.  Good luck.
« Last Edit: December 03, 2014, 11:11:33 PM by MDM »

wtjbatman

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Re: What is the worse case scenario?
« Reply #5 on: December 03, 2014, 10:50:14 PM »
Zombie Apocalypse

Rekon

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Re: What is the worse case scenario?
« Reply #6 on: December 03, 2014, 10:51:21 PM »
I filed MFJ and made under 90k.  So does that mean 12k'ish + penalty is the worse case?

MDM

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Re: What is the worse case scenario?
« Reply #7 on: December 03, 2014, 10:59:58 PM »
I filed MFJ and made under 90k.  So does that mean 12k'ish + penalty is the worse case?
Go back to your tax return for the year in question.  Recalculate, assuming the "7k medical, 3k charity and 19k business expenses" are all $0.  Should be a relatively easy exercise because all your other inputs will remain the same.

Worst case is "the difference between your tax due in the original return vs. the recalculated return" + penalty + interest.

Rekon

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Re: What is the worse case scenario?
« Reply #8 on: December 03, 2014, 11:07:26 PM »
This helps. Thanks MDM!  By any chance do you know the max installment term to pay back?  I heard 60 months but I'm not 100% sure. 

Rekon

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Re: What is the worse case scenario?
« Reply #9 on: December 03, 2014, 11:23:04 PM »
Also, i'm assuming the IRS charges interest for installments and i'm probably better off getting a loan... or borrow from my 401k.  Eeek.

sd85

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Re: What is the worse case scenario?
« Reply #10 on: December 04, 2014, 01:12:48 AM »
What year are they auditing?

rmendpara

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Re: What is the worse case scenario?
« Reply #11 on: December 04, 2014, 10:28:23 AM »
If they deny all your itemized deductions then you would default back to the standard deduction. I don't know what year that was, but let's call it 10k. So you would "pay back" the taxes on an additional 19k of income multiplied by XX% tax rate and then any penalties.

To get a general ballpark, let's call it 19k x 25% = 4.75k plus some fees and stuff... maybe 6k?

mozar

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Re: What is the worse case scenario?
« Reply #12 on: December 04, 2014, 05:10:46 PM »
So a robot is commissioned to count every grain of sand on the planet. The robot realizes that humans keep messing up the grain count. The robot decides to kill all humans.

FIreDrill

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Re: What is the worse case scenario?
« Reply #13 on: December 04, 2014, 06:30:31 PM »
So I didn't see you say who you used to do your taxes... If you used turbotax, did you happen to get their audit protection?  I just went through an audit where the IRS was challenging some of my tax credits.  I never spoke to the IRS and immediately looked up my audit protection information.  Turns out the audit protection was through taxaudit.com.  I contacted them, showed proof of audit protection, and they took it from there.  They were extremely helpful and took care of everything.  I simply provided them the documents they needed.  At the end of it I owed the IRS nothing so I was very happy.


I don't want this to sound like I'm pitching them to you but they did a great job with my case.  If you did use turbotax, see if you got the audit protection through them.  If not, they may still handle your case for a fee.

Good luck!
SS

Rekon

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Re: What is the worse case scenario?
« Reply #14 on: December 05, 2014, 04:06:40 PM »
StudentStacher, I did purchase the taxaudit.com protection.  They are currently helping me.  My wife is having difficulty obtaining a letter that states they don't reimburse for business expenses as she no longer works there.  Other than that I am gathering all my receipts.  I have a ton but I'm missing quite a bit.  Taxaudit.com was able to convert my office audit to a correspondent audit.  So I guess that's good.  They have been extremely helpful so far.

FIreDrill

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Re: What is the worse case scenario?
« Reply #15 on: December 05, 2014, 05:23:41 PM »
StudentStacher, I did purchase the taxaudit.com protection.  They are currently helping me.  My wife is having difficulty obtaining a letter that states they don't reimburse for business expenses as she no longer works there.  Other than that I am gathering all my receipts.  I have a ton but I'm missing quite a bit.  Taxaudit.com was able to convert my office audit to a correspondent audit.  So I guess that's good.  They have been extremely helpful so far.

Glad to hear it.  Good luck tracking down the rest of the documentation.

Best of luck!
SS