Anyone ever get audited by the IRS?

Question

Just curious if anyone has ever got red flagged or a random audit from the IRS for their rental investments. I haven’t yet, but wondered what that experience was like. I keep good records, but hope I never have to go through something like that!

Greg O'Brien · Answer

@John Morgan the last audit I went through involved a client, who in prior years, prepared his own business return. Almost every deduction was ending in 00, like $500, $1,000 etc.In person audit at the IRS was right after that big govt shutdown. Auditor was very nice and really, we came to a good win win. She needed to move the case and my client needed a win on the $s owed. She actualy stated the red flag appeared to be his mileage deduction. We had no log, but recreated it on his calendar and she allowed about 50%.Audits arent black and white, more of a negotiation from my experience.

Michael Plaks · Answer

@John MorganThe experience is at a minimum unpleasant and at a maximum infuriating, depending on the complexity of your tax return, on the quality of your records and supporting documents and on the competence and attitude of the IRS agent. Fortunately, random audits were extremely rare in the past, and I have not seen any random ones in the recent years.Most audits are for a reason. Unfortunately, some of the common red flags result from legitimate tax returns and come with the territory. For example, most first-time flippers lose money when they start, and often lose a lot. Losing money in business is an audit flag, and the higher your losses the higher the risk. But if you have it, then you have it. Ditto for tax returns claiming the Real Estate Professional status which are consistently audited due to widespread abuse of this loophole. Again, if you qualify - then you absolutely should claim it, just have your ducks in a row.Other audit flags are kind of common sense: forgetting to include 1099s, rounded numbers, populating every single box in a form, identical numbers across multiple properties, using the wrong form, etc.

Lance Lvovsky · Answer

In recent years, the government has shifted to audit campaigns with sure fire wins for the government - areas such as foreign reporting (or lack thereof). Many folks do not realize the implications of having a foreign bank account, foreign asset, foreign income being generated, etc. Lack of reporting re: virtual currency is on the rise as well.For rental properties, honestly if you are audited for this, then the tax preparer usually screwed up royally. Government will not spend resources auditing rental p & l. However, if you have certain elections such as real estate professional and W-2 income from an industry not related, be prepared for the government to come knocking.

Lance Lvovsky · Answer

I could tell you an audit is not a good experience. Not for you, nor for your CPA. I am fortunate that very few of my clients have ever been through it. But, I also do not sign off on returns that I know have audit red flags. There are certain triggers with the government, and knowing what these are has significantly reduced inquiries.Best thing you can do as a taxpayer is keep good records, invoices, cancelled checks, time logs (if necessary), financials, etc.

Account Closed · Answer

If you are consistent with your dates & amounts (when you bought a property, your planned use for the property, rents, depreciation and when you sold a property, etc) the likelihood of an audit are greatly reduced. When there are date discrepancies, different numbers for the same property over the course of a couple of years, that's a red flag. If you say you bought it for $200,000 on your 2016 and on your 2018 you say you bought it for $250,000 - that would be a problem. ;-)Never assume whomever prepares your return for you didn't make a mistake. They are human. Take a look before you file to ensure accuracy. Since I do some flips, I photocopy all receipts and put them in chronological order, enter them into spreadsheet and scan them and add the scans to the file and staple the receipts together in the same order and add that to the file, too. Lots of receipts (Home Depot, Lowes, AC) fade over time and scanning them shows the IRS audit agent that you take care in preserving records. That makes the audit go a lot faster and they just do random checks for accuracy rather an intensive "shoebox" sifting if you keep everything in a shoe box. Because of the volume of business I do, I take a day every six months to update rather than waiting until the last minute. That also helps me in tax planning and asset protection.

John Morgan · Answer

Great info, thanks!

John Morgan · Answer

Makes sense. Thanks!

John Morgan · Answer

What are some of the triggers you see or hear about? Thanks for your response.