Filed under: IRS, Representation, Small Business, Uncategorized
A few years back I represented a client who had lost all of his tax records in a flood. He had excellent documentation of the flood, but the IRS didn’t care about that, they still wanted him to back up some items that he had deducted on his tax return from a few years back. They wanted copies of receipts for expenses that he claimed on a tax return that was destroyed in the flood. He filed the receipts with the return, everything was destroyed.
This year, with all the tornado damage across the Midwest, including my own neighborhood, it seems like reconstructing records is an important topic.
First the easy stuff: You can get a copy of your tax return transcript for free from the IRS. If you still live at the same address that was on your last tax return, you can do it online at: https://sa2.www4.irs.gov/irfof-tra/start.do
If your address has changed, you will either need to fill out form 4506T, here’s a link to that: http://www.irs.gov/pub/irs-pdf/f4506t.pdf or call the IRS at 1 800 829-1040.
Not only can you get information about your tax return, but you can also get information from your W2s, 1099s, and 1098 forms if you need it. Note: the IRS W2 information does not include your state tax withholding, this is really a problem if you’re having a state tax issue, but at least you’ll have a list of your employers and you can contact them if you need that.
So that gets you the information that the IRS already has about you in the first place, but how can you reconstruct documentation when all of your files have been destroyed? One thing in your favor, although the IRS requires actual receipts during an audit, if you’ve been the victim of a flood or tornado or some event where your documentation is lost, they will allow you to prove you expenses some other way. But don’t just walk into an audit and say, “My files were destroyed you’ll just have to take my word for it.” We’re talking about the IRS, they don’t take your word for nothing. You’ll have to show them that you put some effort to recreating your expenses and it had better look plausible. So what should we look at?
- Bank Statements: this is really easy if you have a business account and you run all your business expenses through that one account. Even if you’re running your business expenses through your personal account, it still provides you with proof of payment. Most banks let you access your statements on-line for free. Some banks still charge a fee for old statements but they should at least be able to access them for up to three years back.
- Credit card statements: Once again, you can often get these online for free.
Bank statements and credit card statements are your two biggest and best sources of expense documentation, not just for business expenses, but also for proving your charitable donations which is another expense item that’s often looked at.
After you’ve proven your expenses, you may need to recreate your mileage log. That can be tough, but once again, if you don’t try you’ll lose the entire deduction.
- If you still have your appointment calendar, start from day one and figure out where you’ve been and Mapquest everything. (I’ve done this with folks who hadn’t really lost their data, they never had a mileage log in the first place. Technically you’re supposed maintain it on a daily basis, or at least at the end of each week.)
- If you’ve lost everything though, you probably don’t have your appointment calendar to work with. You can check with your oil change company. They keep records of your mileage at each oil change. This will at least give you a baseline to work with. (Hint: if your oil changes show you put 12,000 miles on the car don’t try to claim that you drove 20,000 miles for business.)
- Once, for a client that had lost her mileage log, I was able to show the IRS that she routinely went to a certain store once a week for her supplies. She had driven on some business trips to various cities and we could prove that from her credit card statements as she had made charges in Nashville, Indianapolis, and some other cities. I used those charges to vouch for her mileage there. Although I didn’t have a “perfect” log book, by pulling together that information, the IRS auditor allowed the entire mileage claim because it was reasonable for what the taxpayer was doing.
- If you are in the same line of work, you can take a 90 day sample of your daily business mileage and use that as a sample of what you normally do throughout the year. The problem here being that you might not have the luxury of 90 days to pull a sample together. If you have nothing else to work with, I would at least do a sample log for as long as you can—something is better than nothing.
The most far- fetched proof I ever provided to the IRS was for a client who was adamant that an expense that the IRS had disallowed was legitimate. We couldn’t find a record of it in the bank statement, and it wasn’t something that would go on a credit card. It was a very normal and logical expense for the business but I just couldn’t prove it. (The company refused to provide my client with a new receipt because they were upset because she fired them. Oopsie.) Anyway, I pulled up the company’s web site and they advertised their prices on line. I had printed out the website price list and the agent allowed the expense. I don’t believe that would work under most situations, but once again, if you have nothing else to use it can’t hurt.
As you can see, reconstructing expenses for a tax audit is not fun. (Okay, let’s be real, audits in general aren’t fun but they’re definitely easier if you have all your ducks in a row.) Now might be a real good time to think about how you’re storing your important data. Are you backing up to the “cloud”? Maybe you copy your annual records to a jump drive and store that in your safe deposit box? Or perhaps you have a fireproof box that you keep your records in? It’s a good idea to plan ahead, just in case there is an emergency.
The deadline is coming up, you’ve done your tax return and you’ve got a balance due. Problem is: you don’t have the cash to pay. What can you do?
First, if you can’t pay the whole thing, pay as much as you can now. The more you pay towards your tax, the less you’ll have to pay in interest and penalties. Let’s say you owe $5000, you don’t have that much but you can scrape together $2000, mail in a check for the $2000. Then you’re only dealing with interest and penalties on $3000 instead of $5000. I find that paying something also helps you when you have to deal with the IRS. They open their file and see that you paid something towards your account, it gives you credibility.
In a few weeks, you’ll get a letter from the IRS telling you that you owe them money. When you get the letter, call the number on the letter and talk to the IRS. (Use your good respectful voice that your mother taught you, I’m very serious about that. If you curse at them or threaten them, it will go into your record. It makes it much harder for me to save you after you’ve done that.) When you talk to the IRS, these are going to be your options:
- You may qualify to take up to 120 additional days to pay with no extra fee. They will still charge interest. If it’s possible for you to come up with the cash within 4 months, this is your best option.
- If you know that you won’t be able to pay off the debt within 120 days, you can apply for an installment agreement. You pay a fee of $105 and set up a monthly payment schedule. Generally, they like to set up a plan that has you pay off the money within two years. You can make arrangements to pay the amount over 5 years. Using that $5000 figure, if you pay it over 5 years it would be 5000 divided by 60 months = $83.33. They will round it up to $85. The problem with that is the interest will continue to accrue each month. If you can pay it off faster, do so.
You can apply for an installment agreement yourself online. Go to the IRS website : http://www.irs.gov/individuals/article/0,,id=149373,00.html
What about those ads I see for about settling your tax debt for “pennies on the dollar?” Generally, those ads refer to something known as an offer in compromise. Generally, the IRS will not accept an offer if it believes that you are capable of paying your debt. For example, I once received a phone call from a fellow who said that he owed $20,000 in tax debt and he wanted me to prepare an offer in compromise for him. I started asking some questions and found out that he made $200,000 a year, had substantial cash assets, and plenty of equity in his home. I asked him why he didn’t just pay the tax, he told me “He didn’t want to.” You have to be a good candidate for an offer in compromise before any reputable firm will make one for you. That fellow would never qualify for an offer in compromise, the best he’d get is a monthly payment agreement and he could do that himself for free.
If you are truly in a situation where you cannot pay your tax debt, please get professional assistance. Even if you don’t qualify for an offer in compromise, you may qualify for a reduced payment schedule until your situation improves. Be sure to ask your accountant, “Do you handle debt resolution issues?” Your corner tax store preparer is not trained to prepare the forms for an offer in compromise, and many CPAs don’t want to handle those issues. Look for the phrase “debt resolution” when hiring this type of assistance. Roberg Tax Solutions does debt resolution. (Just thought I should make that point!)
Many people need a copy of their federal income tax return in order to get a mortgage or file for financial aid. You can order a copy of your return from the IRS for $57, but most people can get everything they need with a tax return transcript.
I was just looking at another website that offered to get your transcript for you, for a fee of $99. But you can get that transcript directly from the IRS for free and it’s easy to do. Here’s how:
Call the IRS main phone number: 1 (800) 829-1040
You’re going to hear a computerized woman’s voice asking you questions. You will select “2” for information on your personal taxes.
Next, you will select “1” for information about your tax history.
Next you’ll enter “2” to get a transcript.
[Just so you know, you can call the IRS at 1 800 829-1040, type in 2, then 1, then 2 and it will take you to this next part. You don’t have to listen to the whole computerized menu offerings.]
After that, you’ll be asked for your social security number. If you’re married, use the social security number of the spouse listed first on the return. They’ll be questions to verify your address. They’ll ask what year you need the transcript for, but it’s all computer automated and you respond with your telephone keypad. You can order up to 10 transcripts if you need them.
See how easy that is? It will take 5 to 10 days for your transcripts to arrive at your address. And you won’t have wasted any money!
If you must have a photo copy of your tax return, you’ll need to file form 4506. It will cost you $57 and can take up to 60 days to receive. Before you spend the money, be sure to check with the bank and see if a transcript won’t be acceptable. Here’s a link to the form if you need it. Form 4506
Every year people ask me, “What can I do to prevent being audited by the IRS?” The honest answer is, “Absolutely nothing.” Because in fact, everyone is audited every year. You just don’t know it. Every year, your tax return is run through a computerized audit. First there is the search for missing documents—such as an unfiled W2 form or interest statement. Then there’s the DIF score, it’s a process where the IRS basically checks “what’s normal” for expenses for taxpayers in various income brackets.
When a return is tagged by the computer, then a human being takes a look at it. A return that gets snagged by the computer may still not be audited if it makes sense to the human. If the human still has a question, then an audit letter goes out.
Even people who don’t file tax returns are audited. The IRS runs the documents about your income even if you don’t file a return. If they determine that you’ve earned enough income to file, rest assured, you’ll get a letter about it.
Now I bet you’re wondering, “How do I get my hands on those DIF scores so that I can keep my return from being pulled for audit?” Yeah, I’d like a copy of those too. Unfortunately, the IRS doesn’t publish them. That would be like showing your hand in a poker game.
In the meantime, your best defense is hanging on to your records. Now that tax season is over, make sure that you’ve put all those papers someplace safe. Hopefully, you won’t need them.