Help me settle a debate re: IRS

[Monkeyleg]

On a webmaster forum, someone posed a question about using a room in his home as a tax writeoff. I warned the person to be careful, as the IRS regards such deductions as questionable.

I then told my story. I've had two IRS audits for my corporation, two state audits, and three audits by the unemployment compensation division.

The first audit was for 1987, and it lasted just twenty minutes. The auditor said that my records were so organized (thanks to my wife) that she knew we were on the up-and-up.

The second IRS audit lasted three days. I had an auditor in my office for three days, and I was unable to get any work done, as he had questions every five minutes.

When I asked him what he was looking for, he told me that auditors are not told what they're looking for, as the IRS doesn't want them to stop when they've found the problem/issue. They want them to keep searching until they've examined everything.

Another poster on that forum said I was full of it, and that the IRS can't just look at everything in your financial records.

I have the experience, and this other poster has his opinion. So who's right?

BTW, I remember the NRA having undergone a two-year audit following the 1994 elections. That suggests to me that I'm right.

[Brad Johnson]

Another poster on that forum said I was full of it, and that the IRS can't just look at everything in your financial records.

Hope the other poster never gets audited - he's in for a rude surprise.

The IRS can examine any records connected to the return in question, and for the period being audited.  If the entity being audited is a corporation then all corporate financial records for the audit period are fair game.  If you are a sole proprietor, then ALL your records are connected to the return and are therefore subject to review.  Chalk up one more reason to form a corporation if you are in business for yourself.

Brad

[K Frame]

Yep, I concur.

I maintain a home office where I do quite a bit of profession-related work.

No way in hell am I going to try to deduct anything involved with it.

[BozemanMT]

Out of all the alphabet soup agencies, nothing scares me more than the IRS

<shudder>

[Monkeyleg]

Brad: "Chalk up one more reason to form a corporation if you are in business for yourself."

The auditor also went through our personal checking account. I don't recall the year I was being audited for but, if you're correct, it must have been for 1990. That was the year when I switched from being a sole proprietorship to a corporation.

The auditor looked in our personal checkbook register, and saw a deposit from "Joanne" for $25. He asked what that was for. I explained that Joanne was my MIL, and that my wife had lent her $25 a couple weeks prior, as MIL was short on cash before payday.

I've had colinoscopies that were less intrusive.

Mike, that's a wise decision. The room I'm sitting in now has one wall that's a bank of computers and peripherals. Another wall is consumed by boxes of business-related stuff. Another wall has filing cabinets. But there's another wall that's a bookshelf, with all of my wife's books. Plus there's a closet, where all of my clothing and junk is stored.

No way I'd try to write off this room.

[The Rabbi]

The IRS came up with the idea of a "super-audit" that was described as "like an autopsy without the benefit of dying."  They chose a certain number of people in some income category or other more or less at random and examined EVERYTHING: income, expenditures, you name it.
There was such an outcry from the public that they backed off.  And I have noticed that fewer people are audited in the last couple of years than previously.
But yes, Uncle can do pretty well whatever he wants.  And it is up to you to prove innocence.

[Waitone]

I believe it is called a taxpayer compliance audit.  Nothing is assumed; the TP must produce proof of everything.  I am told it is used to produce statistical models for different types of TP's.  In any case the IRS is our Gestapo.  It runs a parallel judicial system complete with its own case law and courts.  And as was said, guilt is assumed.  The TP has to demonstrate innocence.

[glockfan.45]

The IRS and the ATF are two agencys that are both against what America stood for and scare the bejeezus out of me. To the OP yes the IRS can and will violate any privacy they desire as long as they can make it tax related.

[280plus]

I write off my home office, never had a problem. The part that didn't mae sense was if you wrote off your office that particulasr space or percentag of your house was then deemed to have become "commercial" property because it's being used to generate income. Therefore that percentage of the sale price was subject to capital gains taxes upon sale of the house, should you sell. So for many years I did NOT write off the office. Last year IIRC they changed the rule so that does not apply anymore so I wrote it off. I have not had a problem, yet. If you're on the up and up and you keep careful records you have nohing to worry about during an audit. If you been cheesing the books however...

Not only can the IRS go through ALL your records but while you are only allowed to go back 3 years to look for mistakes THEY made they can go just as far back as they want. 20 years? No problem. Ever been told you can throw your tax records away after 5 years? Do NOT believe it!

[Creeping Incrementalism]

It runs a parallel judicial system complete with its own case law and courts.

Considering how thick the tax code is, I think having courts that specialize in only that is a necessity.  Though not having an income tax at all is the way things shoud be.