March 2016 – I filed 2015 taxes.
May 2017 – I receive IRS audit letter saying I owe $6,400.
June 2017 – I replied with a handwritten letter pointing out their mistakes.
July 2017 – I receive a letter confirming that they received my letter.
August 2017 – I receive a letter saying I only owe $1,600.
I saved $4,800 by not letting the IRS swindle me yet again out of more money. I know, the word swindle is harsh. However, this has been the norm for me since 2012 – get a letter, figure out why it’s wrong, correct the IRS, supply them with proof, and have them correct the judgement.
In the past I have saved as much as $20,000 by correcting the IRS. It’s become a very profitable venture for me.
In this case I owed money which I expected. I had job income and investment gains which weren’t reported to me until after I filed my 2015 taxes. Both of these documents arrived after I filed taxes and I owed taxes on both. I just didn’t want to bother filing an addendum for those taxable events since rarely 3 months go by without me and the IRS exchanging love letters.
Avoiding The IRS Audit Radar
In the tax community there is a phenomenon known as getting on the “IRS audit radar“. Basically, it’s believed that once you get on their radar you remain there. All it takes is a bold write-off or something shady you may have done on your previous taxes.
If you want to avoid it then leave some money on the table. File very conservatively. I don’t buy into that mentality which is why I’m presenting you with this post.
The IRS Audit
The audit process has come a long way. Some of you may remember the tax-person showing up to your parents’ house with a briefcase and them hashing out number for nearly a full day.
The audits now mostly take place by mail. You get a letter saying that you owe more than you thought and the IRS attempts at explaining why you owe the extra money.
Your options are:
- send the money that’s claimed as owed by the IRS
- reply to them with why you don’t owe it
- pay a portion of it and still contest it in order to avoid the interest rates on overdue taxes
Fuck The IRS Audit Radar
If you have a competent CPA then I say fuck their radar. The downside with most CPA’s is that they are far less likely to squeeze every last dollar from your income. Instead, they play it safe because they usually won’t charge you more to deal with audit letters.
However, your CPA will be very competent when it comes to dealing with the IRS. They can usually handle the letters quite well and set them straight or settle up whenever needed. This was one of the best things about my CPA back in the day – any letter I got went straight to him and he was brilliant.
I vote: get on that radar and be proud. Wear a sticker saying that you got audited. When you’re earning $300k a year, the only way to keep your fair share of the money is to squeeze every last dollar from your income.
No need to cheat on your taxes or stretch the truth. Be honest. But if you started a business then list it on your schedule C. If you spent money on work-related expenses then claim it.
Keep Detailed & Redundant Records
If you do anything work related that can be later deducted – and I mean anything, be sure to flag the expense in multiple ways in your records. In the past I would just annotate the expense on my budgeting software. I’m a lot more anal now.
Having a job is expensive and I’m not about to give the IRS the pleasure of squeezing me for all my dough. Whatever I spent in order to earn that sweet dollar is gonna get listed on my itemized deductions.
My record keeping goes as follows:
- I annotate the expense on my budgeting software
- I keep a separate document where I list the expense
- I take a picture of the receipt or billing on my card and label it with #tax2015
- I take pictures of whatever item I buy that could save me on taxes
If the IRS wanted proof for anything, I can barrage them with a gang of documents proving the said expense.
What About Grey Areas?
There are certain expenses that you just don’t know if the IRS will accept as a legitimate work expense. You can spend days on tax forums or even call the IRS to ask about it – no clear answer!
In that case I write it off. When in doubt, err on the side of you. If the IRS then wants to fight me on it then we can toe-to-toe. Until then, if something wasn’t made clear by the IRS it’s going in my pocket.
Don’t let the tax code intimidate you. It’s getting more and more complicated. More and more pages are being added to the tax code.
I know I’m thumping my chest a lot here in regards to the IRS. But in their defense, they are incredibly competent when it comes to dealing with such audit issues and I am always blown away as to how pleasant they are. So, I don’t think there is a need to be intimidated.
Where To Get Help With Your Taxes
Here are some places where I would send a good friend for tax related questions. Ideally ask your questions before you sit down to do your taxes. But, these forums below are incredibly helpful while you’re doing your taxes, people respond quickly.
Turbotax: Turbotax is my favorite place to search. People are incredibly helpful and fucking smart!
Reddit: Unleash the Reddit tax nerds! I browse this forum for fun… on a friday nights… with my disco ball and some tequila greyhounds!
Bogleheads: They are a bit uppity and dismissive but you’ll know right away when someone has the right answer. And when they don’t, the bogleheads forum people will point you in the right direction.
JustAnswer: You have to pay for the JA service per question but… if you don’t get your answer from the first expert then you can ask another. You’ll get your money’s worth and it’s fairly inexpensive.
My IRS Audit Workflow
1. Open & Read Letter
As soon as I get my IRS letter, I open it. I don’t avoid it. Then I briefly look and see what the bill is. On the following pages I review the explanation which doesn’t make sense to me 90% of the time.
That’s it. I just look at the letter and review what’s on it. I don’t look up terminology or try to figure out what’s correct and what’s not. I let this information simmer – my subconscious mind can deal with it for the next week.
What’s the worst possible thing that can happen? I owe money? I owe back taxes? Big deal. I have money. If I didn’t have money the IRS wouldn’t be after me. I won’t go to jail because I don’t do illegal shit. If you’re always honest on your taxes then you have nothing at all to fear.
2. Come Back To It 1 Week Later
Exactly one week later I sit down with a pencil and mark the relevant information on the letter. Most of the pages are bullshit and legal speak. There will be a table breaking down what the IRS thinks I owe and what I reported.
There will be terminology that I won’t understand. I then look them up. I research it and usually post some questions online.
Some things are simple. Such as a 1099-DIV that I forgot about or that didn’t get reported. Easy. I know I owe that so I put a checkmark next to it. The other things that I don’t think I owe I put an X next to.
3. Paper and Pencil
Yeap, I reply to IRS audit letters with a paper and a pencil. I create a paragraph for each item that I want to contest and using my own words I explain why I don’t think I owe it and why the IRS is wrong.
The fewer words you use the better. The less explanation you give the better. If you can use previous tax years as a reference that will help.
I also indicate what items were correct on the audit letter and that I have made the appropriate payments online. There will be a “bill” that you can send back in your envelope with the amount that you have paid.
I snap a picture of the document for my own records and mail it off. I write in my calendar what date I mailed it off. I take pictures of all the documents I needed to do my research and stash them away.
4. Make The Payment
I make my payments online at the IRS affiliated payment website. I document on my own calendar when I made the payment, how much, and for what items.
Do this immediately. Don’t wait. You want to make this payment before you send out your explanation letter so that the IRS person can see that you have made your payment. This tells them that they are dealing with an intelligent and responsible person.
5. Wait For Confirmation Letter
The IRS will send you a letter saying that they received your explanation letter. They will again tell you that you should pay whatever you think you might owe so that you aren’t charged too much in interest payments.
I document that I received this letter and then toss it.
6. Reply or Accept Final Letter
Most of the time this final letter will say that they have accepted my explanation and that no further money is due. I take pictures of this and mark it on my calendar yet again.
If the letter says that I still owe a little more and I agree with it or decide that it’s too little for me to argue with any further then I go online and make the payment.
That’s it. Done.