I got audited by the IRS and survived - my story!!!

[Joe Robinson]

Hello fellow investors,

In 2016 I got audited by the IRS, and it got started due to my real estate investing activities.

This was a full-blown FIELD AUDIT, where they went through everything of mine. I have lots of business and personal checking accounts, and they went over the bank statements line by line. They asked for TONS of paperwork, and this took 6 months to complete. But I survived! And I owed $0 – in the end!

 About me:

- I invest in notes, rentals, I do flipping & wholesaling

- I invest in real estate full-time

- I have no S or C corporations / but I do have pass-through single member LLCs for liability protection, so everything goes directly to my 1040 & associated schedules

- Up until recently, I did my own taxes & books

- I am fairly educated on taxes. I am by no means an EA or CPA, but I know the fundamentals of bookkeeping and how to do rather complicated taxes.

- I take every legitimate deduction possible. I take ‘em all. And every year I read a new book on tax law for small businesses and real estate investors – just to keep up on what’s new.

What I learned:

- What really set off the IRS looking at my tax return was me filing as “real estate professional”, where my passive losses exceeded the $25,000 normally allowed. It was completely legitimate, but this IS a real IRS audit target. So be aware of that. In the end, everything was A-OK for me.

- The IRS has 3 kinds of audits – [1] a mail audit (where they ask for information on something specific, e.g. please provide proof you donated $3000 to your church in 2016), [2] an in-person audit (where you go into the local IRS office, and provide proof for up to 4 specific things on your return), or [3] a field audit (where they come to your home and/or office, and have the right to go through ALL your bank accounts, and all your records, etc, etc. This is the big scary audit everyone dreads…and the one I got!)
- If you are a successful business person making a lot of money – the odds are you WILL get sued and/or audited at least once in your lifetime. Both events have happened to me, and both times, I have “won”. Do NOT let fear of these things stop you from being successful.

- Do NOT BE NERVOUS / SCARED if you get audited. I sure the hell was! Haha. I’ll admit it. When I hired an EA to represent me…I was told “don’t worry, everything will probably be fine”. That was not that comforting, at the time. Haha. Anyway – I later learned - the IRS employees are not all monsters waiting to deny every deduction on your tax return, for no reason. No, they’re usually actually decent human beings, and if you are HONEST with your taxes, and keep a good audit trail [you keep good books], and have good records/receipts – guess what – when you are audited … they’ll review everything, say thanks, and it’ll be over with nice & quick. If you make a mistake, they won’t throw you in jail... worst case you pay what’s owed & some penalties and interest. Guess how much I owed? Nothing! Nada! And they looked at EVERYTHING!

- I learned I actually kept good books / records (whew!); I have now outsourced that work to my new accountant --- to make my life easier.

- If you do get audited, hire a CPA or even better – an EA/enrolled agent – to represent you. Why? Even though I am “smart” when it comes to finance/taxes, I do not speak the language of taxation. So I wanted someone between me & the IRS agent, who could do a lot of the talking on my behalf. Note if you hire a CPA, make sure he/she has both CPA & EA certifications. Why? A CPA may not deal with IRS audits and/or taxes on a constant basis, where that’s all or a lot of what an EA does.

- I am going to restructure a couple of my real estate businesses, into S-Corps and/or LPs by the end of this year. Why? The IRS watches people who have Schedule Cs like hawks – and that’s what I have [2 of them] – because a lot of those folks make a lot of errors on their tax returns [note I have a Schedule E & other schedules too]. I made no errors, but I’d rather be an S-Corp or LP where I’m not on the radar as much.

- In the end, if you get audited, do not lose any sleep over it. Remember … if you’re honest, keep good records, and do your best … you will be OK. If you are not great with bookkeeping & accounting, or don't have time time, outsource that work. 

If you have any questions ... please ask me ... and I'll post a response. Thanks!