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IRS Audited Real Estate Professional and Denied All-Business Expenses

American bar association: Spring 2024 Virtual Settlement Week

In 2022, a realtor/business owner was audited, denied ALL business deductions, and faced $172,000 in additional tax and penalties… then we intervened.

With each of us having 15+ yrs of experience in tax law, Jeff and I met while volunteering for Virtual Settlement Week – an American Bar Association (ABA) Tax Section initiative.

We were paired up to represent a Denver, Colorado-based taxpayer who had, by now, spent 2 years overwhelmed by the entire ordeal.

With Jeff, the taxpayer, and myself meeting for the first time in late March 2024, we only had a few days to prepare for the 2-hr settlement meeting with IRS Counsel regarding the matter. Our preparation time was eventually reduced to only a few hours due to taxpayer delays – this was NOT ideal.

With Jeff and I having previously discussed a game plan, our settlement conference began with Jeff requesting penalty abatements and consideration for the Cohen rule.

Since the taxpayer had not been able to provide documentation, I began questioning the taxpayer with the goal of clarifying a $38k contractor expense – a seemingly easy start for justification. His explanation clearly showed the original deduction needed an adjustment. After recalculating the expense, the IRS Counsel agreed to accept the adjustment provided.

One line item down, and two entire Schedule Cs to go!

Having established credibility with IRS Counsel, we managed the taxpayer’s communication throughout the meeting in an effort to prevent him from oversharing.

We continued asking questions and recalculating expenses in the same manner for each line item on the Schedule Cs.

IRS Counsel accepted our request for every recalculation and penalty abatement proposed.

With 15 minutes to spare, a settlement was reached, all parties were happy, and the taxpayer saved over $70k in taxes and penalties.

Moral of the story:

  • Integrity, kindness, a touch of firmness, and a willingness to be reasonable goes a long way when representing taxpayers.
  • Although some taxpayers may not understand how to navigate the system, all taxpayers should have access to those of us who can.
  • Only claim on your return what you can prove because no matter who prepares the return, you, the taxpayer, will always be 100% liable.
  • Organize and store that proof electronically so you can access it with ease.
  • If you’re getting audited or owe back taxes get help from a seasoned professional – it’ll make your life a lot easier

Share your thoughts

Have you had a similar situation with the IRS? Do you owe back taxes because the IRS wouldn’t allow your business deductions? How did you handle it?

I’d love to hear from you. Leave your comment below.

Talk soon!

Anisha


So, what exactly is Virtual Settlement Week?

According to the ABA, “The goal of Virtual Settlement Week is to serve taxpayers in geographic areas where it might be difficult to access pro bono representation and generally to increase pro bono representation and settle cases before trial, whenever possible.” Attorneys are paired with EAs & CPAs who also have a desire to give back thru pro bono representation.

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