A letter with tax return?

February 14, 2010 5:48 PM

I'm concerned I will be audited by the IRS because circumstances during the past year drastically changed our profit for the year thus resulting in a large refund, as a percentage of what we prepaid through estimates. Nothing was done inappropriately/questionably/illegally and the money is owed to us but I would like to head-off an audit. Should I include a letter that explains these circumstances or would that draw more attention to the issue? Should I file early or late? Thanks!
posted by anonymous to Work & Money (9 answers total)

My understanding is that the IRS now uses statistical modeling to determine which returns to flag for audit (plus some percentage that are just random). If your circumstances fit their model of suspicious returns (because of something internal within this year's return, or relative to your filing history), they'll audit you, if they don't fit and you're not randomly selected, they won't. So save the letter writing until if/when they decide to audit you.
posted by Jacqueline at 5:52 PM on February 14, 2010

Don't include a letter, and don't file late! If you are audited, be prepared to back up your return.

By way of example, a friend of mine had a huge refund due to massive medical bills while she and her husband had greatly reduced income. The IRS questioned them, and she provided copies of the bills.

It takes a while for them to resolve things, but if you can prove the veracity of your return, there should be no problem in the end.
posted by jgirl at 5:54 PM on February 14, 2010

Oh, and one factor in their model is how much additional tax revenue they'd expect to recover if they find an error or tax fraud in the audit. You are far from alone in having a sharp drop in profits this year, so that alone isn't going to be seen as that unusual. So,unless your business is big enough and/or the drop sharp enough that they would recover a lot of extra money if you were lying about the drop, you're probably not getting flagged.
posted by Jacqueline at 5:56 PM on February 14, 2010

I've been audited, and it really wasn't a big deal. I had done nothing remotely shady--just had strange circumstances--and a few professionally-phrased letters cleared it right up. That doesn't answer your question, of course, but I hope it helps the concern. All you can do is file your return as normal and retain documents relating to your unexpected decrease in profits.

I've also worked on a number of audits for clients, and the IRS is generally quite professional. It takes a lot to put them in "out for blood" mode, and it's not the default approach to every oddity in a tax return that they decide needs looked at.
posted by planet at 6:08 PM on February 14, 2010

don't include a letter, don't file late, but for gods sake don't file early. in my experience (four years in tax accountant office, and my dad worked for the IRS until ~5 years ago), most files selected for random audit come from early filers - you know, the ones that go to HRBlok or *my girl who does my taxes* on Feb. 2.

so much for random.

as for flagged audits/fines & interest, my dad tells me (and again, experience at the accountant's told me) that the time for letters is after they send you one. your best recourse if that happens is to write a truthful letter explaining as completely as you can, and remember your please and thank yous.

Pop always said if he got a nice pleasant letter he'd abate/accept the filer's reasoning/work with them, but if he got some asshole telling him where to get off, he'd stand on the fine/pursue the audit/return the favor.
posted by toodleydoodley at 6:20 PM on February 14, 2010 [1 favorite]

They won't read a letter. File in April, before the 15th obviously, and make sure you save every single scrap of paperwork to back up your return. If you are audited, as noted above, that's when they'll want to read a letter and see your documentation.
posted by CwgrlUp at 6:49 PM on February 14, 2010 [1 favorite]

What does your accountant say? Not your book-keeper, but your accountant? A good accountant will be able to help you out, and you will rest easier at night.
posted by KokuRyu at 9:22 PM on February 14, 2010

Believe me, a lot of businesses had drastic income reductions last year. Even in normal times business incomes vary. It is nothing out of the ordinary. They don't care about the refund. They had free use of your money for most of the year. Don't worry about it and certainly don't send in irrelevant explanations.
posted by JackFlash at 10:01 PM on February 14, 2010

You may not get a full on audit. After my wife and I got married, we had an irregular tax return due to her selling her house. The IRS sent a letter asking for clarification, we provided it, received a letter a few weeks later that said they were satisfied with our explanation and considered the matter closed.
posted by electroboy at 6:20 AM on February 15, 2010