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IRS audit. survived it

Level 11

Over all these years have maybe had two returns audited and the one was a large refund request on a form 1040X, so that one is not surprising.  I am in Ohio and what I thought was a little interesting is the IRS auditor is in PA so she wanted to do the audit by phone.. great I thought.  The issue was a broker dealer who rec'd a 1099 in his name but the funds are actually deposited into the C Corporation where the taxpayer owns that C Corp. 

The prior accountant picked up a gross figure on the schedule C that was more than the amount on the 1099, the amount of the 1099 was the amount on the 1120's revenue.  Could not figure out why the 1040 Schedule C had a gross more than the 1099.  On that same Schedule C the original preparer then deducted an amount less than the amount picked up in income, which if the amount reported as income on the schedule C  matched the 1099 it would have been a wash but the initial preparer added $ 160,000 to the 1099, leaving a profit of $ 160,000 on the Schedule C.

To even make it more confusing the initial return had a Schedule C for the wife with one figure on it, income of the same amount as the husband's Schedule C; one item on the wife's Schedule C, income of the $ 160,000.

So in essence the initial return overstated income by $ 320,000!  It made no sense.. spouse is not self employed.. taxpayer is really not self employed either.  This phathom $ 320,000 in income had to come off.. filed a form 1040X having taxpayer Schedule C net to zero after showing the proper amount of income ..  left wife's schedule C out of the amended return but put down in the 1040X there is no schedule C for the wife as part of the 1040X as one never should have been part of the initial 1040 to begin with.

Had a very cordial conversation with the IRS auditor, reviewing each step of my amended return in detail.  She told me she would call me in two weeks and a letter would go out with their findings.. She did not say for sure how she felt but she said she certainly understands why we amended the returns and agrees with the way I prepared the 1040X

One other point I was glad to hear is the reporting on a Schedule C where the 1099 is issued to the individual but the funds are actuallly deposited into the corporation.  As I knew this is very common amongst broker/dealers, attorneys, and insurance agents.  She confirmed that is the proper way to show it on the 1040; that is, pick it up in income and then deduct the same amount as an expense, showing how the funds were paid over to the corporation with the corporate name and the corporate EIN as part of the description for that expense item backing it out, producing a net of zero.

Overall, I felt the audit went very well.  Was clear as I could be as to what took place and I look forward to a successful outcome of this audit.

4 Comments 4
Level 15

It sounds like it went okay. On another forum, a Statewide email based forum, I saw a recent thread that had a similar situation like what you have. Also I think a lot of the smaller IRS offices have been downsized, and that might be why your auditor came out of Pennsylvania.

Level 15

Yeah, we used to have a local office.  That closed a number of years ago so the closest office is now about 70 miles away.

Slava Ukraini!
Level 15

"I look forward to a successful outcome of this audit."

Don't count those chickens before they hatch, they might end up as scrambled eggs.

Did she say where in Pennsylvania she was?  Might have been at the former Philadelphia Service Center, where I think they still have lots of staff.  Or were you guessing her location based on area code of phone call?  That's not always reliable. 

Triggered memories of my last audit.  New office auditor, here in town.  Elderly client had inherited lots of money and donated some of it to her church.  So deductions were large percentage of AGI.  The auditor asked me to prove the Catholic Church was an eligible organization.  That sounds easy (although stupid) but it was more difficult than you think.  Something having to do with a letter in the 1950s to the National Conference of Bishops, as I recall.  

Level 11

well my client called me today on this audit. they were so happy. they received a letter from the IRS saying their refund was approved. over six figures.. i have to adjust my invoice now:)