I am being audited, what is the worst that can happen?

Question

I flipped houses for a few years, spent everything I earned doing that and at my regular job, then went bankrupt and lost all my houses. I am now back in college, on financial aid, and unemployed with little or no assets.

I kept terrible records when I even kept records. The deductions I took were valid, but many i may not even have records for anymore. I kind of stopped organizing and keeping track as I went bankrupt.

Answer 1

The IRS can disallow any deductions that you took that you can't support. But, since it doesn't seem that you have any assets, there's not much that they can go after.

Answer 2

1. Don't take this audit lightly. Prepare yourself to face their questions. Be on time. Be courteous throughout the interview.

2. Collect as much records as you can to support your answers. Check your property records, bank and credit card statements and all the possible sources. Better organize now than be late. Make sure to take as much records at the time of interview. Don't go empty handed. If you need more time, call them and reschedule your interview.

3. To be better prepared and learn more about IRS audit, read IRS publications:

Publication 1: Your Rights as a Taxpayer (only 2 pages)
Publication 5: Your Appeals Rights and How to Prepare a Protest if You Don't Agree (only 2 pages)
Publication 3498: The Examination Process (only 8 pages).

You can download or read these publications at
http://www.irs.gov/formspubs/lists/0,,id=97819,00.html

Answer 3

Real estate transactions have to be in writing, so you can collect your records of sales, purchases, your bankruptcy, loans, cancelled loans, etc.

If you provide information as requested, the worst that could happen is that you are assessed additional tax. Since you went bankrupt, any loans that were cancelled or forgiven at that time are not going to be taxed.

I think it would pay you to have someone represent you. The worst that could happen is that you make statements that unwittingly lead the IRS to assess you more tax than they originally were seeking.

So, if possible, have someone speak for you, you do not have to directly answer any questions. Otherwise, provide them with information requested but keep quiet otherwise.

Answer 4

The worst that can happen is that your deductions that you can't prove are disallowed, and you have to pay tax on the income without being able to subtract those deductions. They might allow some of them even if you can't prove them, especially if you can show somehow that the work was actually done. Do you have any pictures or anything that can show the work that was done.

Be as businesslike as you can with the auditor, and try not to get rattled. They aren't out to get you, just to see that you are paying the taxes that you owe.

Good luck.

Answer 5

Your bankruptcy paperwork should provide some documentation with regard to your financial position. Get someone with experience to look it over & determine if you should send it to the IRS with your response.

Don't rule out using photographs as evidence. If you have a before and after picture of a house, it's obvious substantial work was done if the house looks better.

Try to get your settlement sheets and loan information (from purchase & sale) of each house from the bank or title company--hopefully you stuck with one. There are expenditures on the settlement sheets that are deductions, in addition they would show how much the house appreciated (prove that work was done).

Answer 6

Write IRS and requests a different date for you audit. In the letter include the economic information in your post here including the bankruptcy except don't mention that you have terrible records.

If IRS decides that any additional tax due would not be collectible, it can close out the audit as non-productive and move on to one where it can get some money. All the expenses you don't have records for can be disallowed.