I'm in 2015 tax audit hell

[Erica Nagle]

So my 2015 (the year we started rehabbing properties full time) was audited. I made the mistake of not using a CPA and she messed up my tax return huge. Long story short I got a $14k refund. During the first quarter of 2015 I had a full-time job in IT I paid $14k in taxes. With all of the deductions we were told we could take at our guru class we were able to show no income and I got all of that money back. 

I found a CPA before I was told I was being audited and we planned to file an amended return because as I suspected the original accountant did everything all wrong. Unfortunately we weren't quick enough. We removed all of the deductions that I couldn't actually take because they were related to the property I sold in 2016. Additionally we removed the $57k in guru courses I was told could be deducted. The result was me owing around $11k. Fine, not awesome but not the end of the world. 

Then I got a letter with the result of my audit and it stated I owed the IRS $25k ($1,400 in interest, $4,500 in fees and the rest is tax liability). Turns out the IRS dude decided that none of the schedule C deductions were allowed because I was not a 'dealer'. Even though I had bought and sold 10+ properties over the last 15 years it didn't make me official. We called the IRS guy and argued with him and he said he wanted more explanation and documents of a few things. We sent the requested info and I just got the revised audit result. It actually got worse and I apparently owe almost $29k. I just sent a note to my CPA and am waiting to hear back. Schedule C was again not allowed and I'm not sure what the additional tax is. 

I don't know what to do. Do I need a new CPA? Do I need to fight this as my CPA said we could do. Do I just pay it and move on? Chalk it up to yet another VERY expensive lesson learned. I just can't believe how it just keeps growing. 

[Brandon Hall]

@Erica Nagle unfortunately no one here will be able to provide the advice you are looking for with any accuracy. There are a lot of facts and circumstances that need to be examined and understood.

I think you'll agree that this is a good example of why using a CPA, upfront, is extremely important. The CPA will help document the tax position, and thus be able to defend against an audit.

Question: when you said you've "bought and sold" 10+ properties, what does that mean? Were you flipping? What was the average hold period for the properties? This is likely what the auditor is looking at to make the determination. Your CPA needs to look at the same facts and make the case that you indeed have a Sch C business.

In fact, if you indeed have a Sch C business, I would be akin to arguing that your educational expenses ARE deductible. They helped you expand upon your current skill set rather than qualify you for a new trade or business. Tell your CPA to check out T.C. Summary Opinion 2016-35: https://www.ustaxcourt.gov/UstcDockInq/DocumentVie...

Your current CPA may be doing everything necessary to defend you, but since the IRS revised UPWARDS it makes me wonder what experience (specifically real estate) the CPA has.