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  • Tax audit advice

    I'm currently undergoing a tax audit, a random selection the agent tells me. I wanted to pass something along that a partner of mine from years ago told me. He advised that you should always get cash for your misc deposits into your bank account instead of depositing it into the account. His rationale, which I am finding is true, is that you have to justify every deposit in your accounts. The IRS agent has asked and gotten all our bank account records and is going over every deposit. I am being asked to justify and explain almost all of them over the 2017 year. Fortunately I have been able to get copies of cancelled checks from the bank and explain every deposit but it has been a real pain in the rear. Going forward I will just get cash for all my checks, except the large easily explained items. What a huge savings in time and human capital if we could just go to a flat tax system!

  • #2
    I am sorry that you are going through this. Fortunately I have not faced an audit since my last audit around 20 years ago.

    Comment


    • #3
      Pretty easy if you keep a checkbook. The check register has a column “deposit” .... never mind.
      Old school. Like balancing a checkbook.

      Comment


      • #4
        Maybe I am not following. Does your online checking account not have a scanned copy of the check that you can look at?

        Comment


        • #5
          I would think your bank statements would make this a non-issue.

          Comment


          • #6
            What kind of checks being deposited are we talking about? Like $25 check from grandma for my birthday? $15,000 checks from your LLC to your personal account?

            I don’t really deposit many checks, since all my paychecks are electronically deposited.

            Comment


            • #7
              Not enough info, but it sounds like you may be undergoing a (very rare) “field audit”. If so, my heart goes out to you. NOT fun (or even close) and very time-consuming (not to mention - STRESSFUL). Thanks to such “advisors” as your boss, these audits can be especially onerous when the auditor then moves to your personal bank account/tax return and asks for documentation on all deposits you have made. Didn’t deposit your $$? Be assured that another technique used by auditors is to compare your living expenses to the income you have reported to them. Of course, another expected technique is for the auditor to compare the reported (1099/W2) income to your tax return. And so forth...

              Bottom line (at least, in my book) is to expect the IRS to have bloodhound capabilities. And I am not responding to encourage you to be legit, as I will assume that is your goal. I am commenting to applaud the majority who have (or are) ethical tax preparers and who make simple mistakes as opposed to following the shaky advice of colleagues for the purpose of avoiding specific questions from the IRS that may expose them to tactics that could work against them in the - admittedly unlikely - event of an audit. (Apologize for the run-on sentence. Late and tired.)

              We do NOT play audit roulette. Otoh, we expect clients to plan to pay the least amount of taxes - legitimately - and who trust us to educate and inform them as to options and opportunities available w/in the constraints of the tax code in order to help them make optimal decisions. But...not here to aid and abet in questionable choices that may not hold up in the event they find themselves in your unfortunate audit situation.

              Truly, you have my sympathies for what you may be/are going through. But I must also say that I do not support your “solution”. Keep good backup reconciliations. Assume you are being advised by a competent, experienced CPA.
              Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                Sounds like your got the dreaded NRP Audit. We were subjected to this random research audit a few years ago.

                They dig DEEP.

                Literally ask every question and sourcing. They started with my son's return that chased into our full tax returns into our LLCs and properties. They asked for everything involved in all those returns. Deductions, deposits, defense of active participation and justification. It spread over 4 months of ~weekly contact and 2 on-site visits before completion.

                Fortunately we completed this without professional help (tax or mental) and without any citations/infractions. But it was intense.
                Last edited by StarTrekDoc; 10-08-2020, 06:20 AM.

                Comment


                • #9
                  Originally posted by Tim View Post
                  Pretty easy if you keep a checkbook. The check register has a column “deposit” .... never mind.
                  Old school. Like balancing a checkbook.
                  I do keep a checkbook and record deposits, but if I deposit 5 checks at one time I just recorded "deposit" and the amount. Not enough room to describe what each one was.

                  Comment


                  • #10
                    Originally posted by endo4jc View Post
                    Maybe I am not following. Does your online checking account not have a scanned copy of the check that you can look at?
                    My bank only goes back three years. They charge you for images of checks prior to that.

                    Comment


                    • #11
                      Originally posted by MaxPower View Post
                      What kind of checks being deposited are we talking about? Like $25 check from grandma for my birthday? $15,000 checks from your LLC to your personal account?

                      I don’t really deposit many checks, since all my paychecks are electronically deposited.
                      Multiple checks deposited at same time and grouped together. Could include payment for rent, ebay sale, rebate check for something, etc....

                      Comment


                      • #12
                        Originally posted by StarTrekDoc View Post
                        Sounds like your got the dreaded NRP Audit. We were subjected to this random research audit a few years ago.

                        They dig DEEP.

                        Literally ask every question and sourcing. They started with my son's return that chased into our full tax returns into our LLCs and properties. They asked for everything involved in all those returns. Deductions, deposits, defense of active participation and justification. It spread over 4 months of ~weekly contact and 2 on-site visits before completion.

                        Fortunately we completed this without professional help (tax or mental) and without any citations/infractions. But it was intense.
                        That's exactly what we're going through. Not fun. I have a CPA who is helping a little bit.

                        Comment


                        • #13
                          Originally posted by jfoxcpacfp View Post
                          Not enough info, but it sounds like you may be undergoing a (very rare) “field audit”. If so, my heart goes out to you. NOT fun (or even close) and very time-consuming (not to mention - STRESSFUL). Thanks to such “advisors” as your boss, these audits can be especially onerous when the auditor then moves to your personal bank account/tax return and asks for documentation on all deposits you have made. Didn’t deposit your $$? Be assured that another technique used by auditors is to compare your living expenses to the income you have reported to them. Of course, another expected technique is for the auditor to compare the reported (1099/W2) income to your tax return. And so forth...

                          Bottom line (at least, in my book) is to expect the IRS to have bloodhound capabilities. And I am not responding to encourage you to be legit, as I will assume that is your goal. I am commenting to applaud the majority who have (or are) ethical tax preparers and who make simple mistakes as opposed to following the shaky advice of colleagues for the purpose of avoiding specific questions from the IRS that may expose them to tactics that could work against them in the - admittedly unlikely - event of an audit. (Apologize for the run-on sentence. Late and tired.)

                          We do NOT play audit roulette. Otoh, we expect clients to plan to pay the least amount of taxes - legitimately - and who trust us to educate and inform them as to options and opportunities available w/in the constraints of the tax code in order to help them make optimal decisions. But...not here to aid and abet in questionable choices that may not hold up in the event they find themselves in your unfortunate audit situation.

                          Truly, you have my sympathies for what you may be/are going through. But I must also say that I do not support your “solution”. Keep good backup reconciliations. Assume you are being advised by a competent, experienced CPA.
                          I will be following my recommendation going forward, all deposits less than a few thousand dollars that are not easily explained on deposit record will be cashed, not deposited. I'm not going through this again!

                          Comment


                          • #14
                            What will you do with all that cash?

                            Comment


                            • #15
                              Originally posted by endo4jc View Post
                              What will you do with all that cash?
                              Put it towards another one of these:

                              https://www.sanfranciscosportscars.c...lm-gt40-c-925/

                              I built this car a few years ago in my garage and recently sold it to a guy in San Fran through the "Bring a Trailer" website. He has it listed for sale through this sports car site in San Fran. It was an amazing project that took me several years.

                              Comment

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