Q: I received a notice from the Internal Revenue Service saying it wants to audit several categories of deductions on my Form 1040 for last year, including hefty write-offs for charitable contributions and casualty losses. My mother-in-law says that I must hire a tax professional to represent me at the examination. Is she right?
A: It all depends. What kinds of deductions are being scrutinized and how much is at stake determine whether you should be accompanied to the audit by a tax pro, such as a lawyer, certified public accountant, or “enrolled agent.” An “enrolled agent” is someone who is not a state-licensed attorney or certified public accountant but who is a former IRS employee or has passed a stiff IRS-administered examination on taxes.
Perhaps the examination for which you are being summoned involves nothing more than routine substantiation of expenses. Either you can come up with the required records or you cannot. It might be possible for you to handle it without the assistance of a pro. To illustrate, suppose the questioned deductions include medical expenses or real estate taxes, the types of outlays that usually pass muster if they are documented. If that is the scenario, it often proves possible to get through the audit on your own.
Be aware that the law always authorizes you to go in yourself at first to find out just what is at stake. Think of that tactic as comparable to chicken soup: It can’t hurt and it might help. Let’s say you do go in on your own and discover that the IRS is willing to settle for another $250, plus a few dollars of interest. Odds are that you are going to decide against hiring someone to contest that amount. Assume, instead, that the feds want to exact several thousand dollars, as well as a hefty charge for interest and penalties. All is not lost. The law specifically allows you to request a delay in which to seek assistance.
Are there issues that involve questions of interpretation of the frequently fuzzy language in the Internal Revenue Code? Then it might be wise to have an expert on your side. An example: The dispute could be whether uncollectible funds that you advanced to a family member or friend ought to be designated a loan—deductible as a bad debt under the rules for short-term capital losses on Schedule D of Form 1040—or merely a gift. The latter is a nice gesture that should assure you a preferred place in whatever kind of life is yet to come, but assures you no deduction anywhere on Form 1040 because of the absence of a creditor-debtor relationship.
Fees paid for tax help at an audit can be included with your other itemized deductibles under "miscellaneous deductions" on Schedule A of your next Form 1040. However, most miscellaneous itemized deductions are allowable only to the extent that their total in any one year exceeds 2 percent of your AGI, or adjusted gross income. AGI is the amount you show at the bottom of page 1 of Form 1040 after reporting salaries and other income sources and deducting such items as funds placed in traditional Individual Retirement Accounts and payments of alimony. The AGI figure is arrived at before you itemize for outlays like charitable contributions and list exemptions for yourself and your dependents.
Julian Block may be reached at firstname.lastname@example.org.
By Julian Block