What happens when the IRS audits a tax attorney, like me? Most clients don’t know this, but I have personally experienced an IRS audit. So I know all too well the stress that accompanies receiving an Audit Notice from the IRS, and the anxiety of putting together documentation and hoping I get through the audit without owing a lot more in taxes. Here’s why I was audited and how it turned out.
Applying For A Job At the IRS Triggers An Audit
My wife, Karen, would have preferred I let her know in advance that accepting a job with the IRS meant we’d be audited. Guaranteed we’d be audited, in fact, because everyone hired by the IRS must undergo an audit. That’s because the agency wants to ensure its employees know what taxpayers go through during an audit, and also because it wants to avoid hiring anyone who is an obvious tax cheat.
So Karen was none too happy when we received our Audit Notice in 1999, after I accepted the job with the Office of Chief Counsel, the branch of the IRS that defends audits in U.S. Tax Court. Karen did our tax returns and, on the advice of our financial advisor at the time, took what she feared were “assertive” positions on some of our deductions. Turns out they weren’t so much assertive, as things Karen never imagined would be deductible. But they were – legitimately so. Anyway, Karen panicked when we received the Audit Notice: she thought we’d be fined and that I might even lose my new job.
IRS Audits Me
We received a “correspondence” audit, the most common kind. The IRS sent us a letter (the IRS never EVER phones to begin an audit so do not be scammed) requesting documentation for several lines on our three previous years’ tax returns. The IRS asked us to supply substantiation of these claims made on our returns:
- Proof of our dependent, infant daughter, Sophie Schnietz (now Faucher Law’s Creative Marketing Director). This was easy to prove by submitting a copy of her birth certificate
- Proof of the property tax deduction we took and proof of ownership of our house in Houston. This was easy to prove with the Harris County Tax Assessor’s bill, and the closing statement from when we bought the house.
- Proof that Spanish lessons I took and claimed as a business deduction, were for professional development, not just my personal hobby. This was the trickiest deduction to substantiate. When our advisor told Karen we could deduct payments to my Spanish tutor because I traveled frequently to the Dominican Republic for my prior oil firm employer, she balked. “C’mon! John is a collector of languages and this is at least as much for pleasure as for helping him on the job,” she argued. But our advisor said it didn’t matter if I also personally benefited from, or enjoyed learning Spanish, so long as we could draw a direct link between my job responsibilities and my needing Spanish fluency. This was done by submitting correspondence, written in Spanish, from me to several clients (with identifying and sensitive information redacted, of course), and showing a chart of the Spanish-language foreign locations of my former employer and airline tickets proving I’d traveled there.
The IRS gave us one month to submit the documentation, and it took about a month to hear back from the IRS. We received a letter telling us our substantiation satisfied them and that there was no change to the amount of tax owed. Recall that the IRS is mandated by Congress to treat every taxpayer as guilty until proven innocent, – in other words, asking for verification of every claim made on a tax return is not an invasion of taxpayer privacy, as some clients feel it is – but rather an inevitable requirement to ensure compliance and reduce taxpayer “cheating”. The majority of IRS audits performed annually result in no tax changes because, like ours, the audit is asking about easy-to-document claims made on tax returns.
However, if your audit isn’t or hasn’t gone well, call me. The IRS makes mistakes and there are lots of hard-to-document transactions that I can help with.
September 14, 2023