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Being audited. re: my mistakes

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markE

Junior Member
OHIO

Hi, am am a sole proprietor, freelance performer in the media industry. I received audit
notification for '04 and '05 returns. For several years I have basically filled in an Organizer
my CPA has given me and he's taken that as the basis for filling out of my Schedule C.

Audit IDR is focused on Advertising, Cost of Goods, Travel/Entertainment deduction amts.
and all "Other Expenses."
In reviewing my preparation of the Organizers for these years I've found major miscalculation errors and some apparent duplication of figures between several categories. I am worried about the consequences of the amount of discrepancies that clearly exist upon reviewing
my info, mainly because there is a good deal that I simply can't substantiate for lack of records and otherwise the errors are due to my poor preparation of the information where i failed to double check and erroneously figured amounts into more than one category.

As an example, under COGS, I misunderstood and entered a number of the "Other Expenses" items into one of the line items here, and in effect, an amount totaling around 10K is likely inaccurate.

I want to just make this right, acknowledge my mistakes and pay for whatever is due but am extremely anxious about how the auditors tend to treat such oversights ...mainly, I want to emphasize, there was not any deliberate intent but rather a good deal of stupidity and carelessness in my submittal of these Organizers without being more responsible. I readily admit that I am a lousy bookkeeper and the nature of my business in the last few years has been such that I have been very ill organized and bad with my record keeping; i know that many actual receipts for what is claimed simply aren't anywhere to be found.

My CPA has Power of Atty and will represent at the Audit at the end of May. I have not yet discussed the inaccuracies I've found with him in depth...given that its Tax Season so it's fortunately been moved up to May. In retrospect i'm sorry he didn't question some of the amounts in question. Nevertheless, any advice on what to expect and how to present things would be most welcomed and appreciated.

Thanks

Mark
 
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PortlandDMA

Junior Member
I'm not a tax expert, but from what I understand you shouldn't face any criminal actions. Although, you will be responsible to pay any back taxes the Auditor finds you actually owe plus interest (I believe the interest rate is the Fed Reserve rate) and possible fines. Since you already know you're going to owe the IRS, I wouldn't sweat it too much. Just wait till they give you the bottom line and then setup payment arrangements with them. They are pretty lenient as long as you make regular payments as arranged (from my exp).
 

tranquility

Senior Member
Talk with your CPA, he will handle it. Jail is usually reserved for failure to report income, so don't worry about that. However, depending on the size of your business, you may have penalties for substantial understatement of tax liability.

Because it is on a schedule C, you will not only have to pay income taxes but self-employment taxes on the amounts. With penalties and interest, this will clearly run into the thousands. Finally, if the error is similar on both returns, they may very well go another year back. (Or, more, depending on the amount of understatement as to overall liability.) Beyond actual, intentional, cheating where income is hidden, there are few tax problems that money can't solve.

Start saving your pennies, this will cost you some thousands.
 

markE

Junior Member
Re:

OHIO>
Thanks for your input. If the consequences of the discrepancy are fines and penalties owed, This puts me a little more at ease as I go about reconstructing the data than the notion that they are out to make this look like there was some kind of intent. Admittedly, in retrospect i made some huge mistakes in calculation. Amounts in the realm of 10-15k were essentially duplicated/reported under more than just one category for the same expenses because of misunderstanding and errors in figures entered when i totaled things up - In one instance i put something down for one expense and then realized it belonged in another, but neglected to omit the erroneous entry. Definitely sloppy and careless and that, i guess is initially a matter between me and my accountant to discuss as far as how to explain it. All I can say is it was a combination of mistakes. However, all of my Income - 1099/W2s were accurately accounted for without error - though only the Deduction issues are being questioned - and understandably so. I look to simply re-submit everything I can for the categories being asked about and explain what I did on the Organizer and hope it won't result in more than the financial penalties, which i gather it likely will not from what you and others have suggested.

Thanks

MK
 

tranquility

Senior Member
When there are large errors such as you are describing, the auditor will almost assuredly ask for all your bank statments for the period being covered. He will add up all the deposits and make sure you have reported all income and ask you about any not otherwise explained. Simply reporting that which was covered by 1099s or W-2s is not enough. You must report *all* your income.
 

markE

Junior Member
audit

Hi, I am pretty confident that there was not overstatement of income and, if there was not of any major significance and i am not worried about that part of the equation. My bus. income is in the realm of 70k for each of the years btw.

My biggest concern continues to be the 'acceptance of explanation' that i have to offer for the aforementioned deduction amounts, many that i know right now will be tossed out the window left and right. I did some estimation of figures that i will simply have no substantiation for, out of negligence, not willful intent to manipulate anything but because I was exhausted and just said - here's what i have receipts for...here's the additional estimation of what i can't find receipts for...add it together and submit it. Yes,sloppy and a pencil-pusher will no doubt seek their mathematical revenge on a poor creative freelancer like me and see to it that i learn my lesson.
Could the discrepancies in a particular Category go into the range of 10K because of a combination of estimation and inability to account for all my disorganized mess of reciepts...yeah, maybe. Can I justify it beyond poor 'shoebox' record-keeping and not double-checking my addition to fix typos and figures that were accidentally not deleted in a particular column, nope.

What I DO want is to present the situation honestly. I was careless and the CPA didn't exactly go out of his way to double check me on these amounts either.

Again, I can only present everything that i CAN substantiate...and the amt. of the difference for which i cannot - i hope will simply be presented as a disallowance that i can pay the tax and penalty for...

I have never dealt with this audit game - and must say i regret that i have stuck with this sole proprietorship and that i have by some people's reckoning, highly overpaid an accountant who, for several years has simply taken most of the numbers that I gather and fill in FOR him on an Organizer and entered them pretty much as-presented, without ever
discussing the details or, perhaps advantages of changing to a different type of business structure like an LLC format that could simplify things or ideas to make it easier to separate out personal/business expenses.

Be that as it may, you can understand the 'curiosity' of what leads the auditor to be inclined to think of something as deliberate vs just being content with accepting stupidity -- and collecting the bucks.
 
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tranquility

Senior Member
Your accountant can't mathemagically pull numbers out of his ear. If your numbers don't seem in obvious error, what is he to do? Should he demand to see each receipt of each deduction? Please. I don't know if you were mis-served from your engagement, but putting down the numbers you give in the proper format is harder than you may believe.

As to the audit, you don't want to tell the auditor anything. Let the CPA handle it. You are clearly all crazed and you need a person who is calm and who has been through this before. You will not help your cause by going in and expressing how stupid you are.

Do you have a problem? Yes. You are going to have to come up with a lot of money to fix this. You will have to amend your state return and pay them a bunch of money too. If guys in suits want to talk with you, remain silent and find a good attorney. Otherwise think of a big tax bill which will be coming soon. That you go over the same thing again and again about your intent will only be helpful through your attorney to the men in the suits. I don't think they're coming. I've seen big numbers before, and they didn't come. But every post you make, every word you write would make me more suspicious and would check out everything as far back as I can check. Don't go there as that is a very unpleasant experience.
 

LdiJ

Senior Member
There are basically three ways that an accountant handles tax returns.

1. As a paid preparer, which means that he/she takes your numbers and prepares the return, with advice about anything that looks off the wall.

2. As a "review" where the accountant generally reviews your numbers for accuracy (which of course costs more) before preparing the return.

3) As an "audit" where the account gets down to the nitty gritty and basically double checks every little item (which again costs more) before preparing your return.

It sounds to me like your CPA was operating as a paid preparer, which makes the accuracy of the bookkeeping, your issue, not his or hers.

Of course, this explanation is simplistic, but you will get the idea.
 

markE

Junior Member
Thanks.
Gotta tell you though - It's funny. I am hearing a couple of trusted news sources while reflecting on your message and i can't help conveying that if your rational reasoning was "allowed" to be applied to the Bush administration -- and if there were still effectively a genuine Constitutional freedom whereby that organization could be held rightfully account- able for the huge body of deception and outright impeachable offenses it has foisted as-legitimate upon the Electorate -- we should've been under new mangement a number of years ago - well actually starting with 2000 --but I digress, and will deem this 'off-topic' for the purpose of closing this dialogue out, with all due respect and appreciation for your feedback. )
 

tranquility

Senior Member
You can't keep all your receipts in the same shoebox and think the Bush administration is incompetent? Well that tears it, I'm voting Hillary for sure!
 

markE

Junior Member
Hillary

There should be no doubt that Ms. Clinton would have easily outperformed Bush in a high school debate, let alone any of his contemporaries contesting for 2008. : )
 

markE

Junior Member
Unclear reply

There are basically three ways that an accountant handles tax returns.

1. As a paid preparer, which means that he/she takes your numbers and prepares the return, with advice about anything that looks off the wall.

It sounds to me like your CPA was operating as a paid preparer, which makes the accuracy of the bookkeeping, your issue, not his or hers.

Of course, this explanation is simplistic, but you will get the idea.
Well, not really. If you're saying that he was acting as a paid preparer, who by your defintion should be expected to provide input on anything that "looks off the wall," then apparently he failed to point out some things that I needed to double check -- given that I am being audited.
 
Relax, Mark

Really dude. Relax a bit. I know where you're coming from though. I was notified of an audit & couln't eat for like 4 days, because I was worrying about what they might think was wrong that I thought was okey dokey. I was sole prop at the time, sched C, and had never utilized a CPA. I immediately found a wonderful CPA to review the requested items, conduct the audit & everything came out fine. If I however, had been the one facing the auditor, I would have been a deer in the headlights, know what I mean?

Follow Ldi & Tranq's advice. They know what they're talking about & are taking the time to answer you during their busy season. Hire someone to handle it for you & don't open your mouth unless told to by the CPA. And DO prepare to figure out someway to handle any monetary amounts you'll owe just in case. Good luck!
 

LdiJ

Senior Member
Well, not really. If you're saying that he was acting as a paid preparer, who by your defintion should be expected to provide input on anything that "looks off the wall," then apparently he failed to point out some things that I needed to double check -- given that I am being audited.
Well, perhaps you don't understand the definition of "off the wall".

For example, if I had a client who had a huge number of "business miles" in an industry that traditionally didn't have a huge amount of business miles, I would bring that up to the client. If the client assured me that he had a full mileage log for the miles, I would go with his/her figures....after lecturing the client on the possible outcome if his/her mileage log didn't really exist. If your numbers didn't raise any flag with the CPA, its unlikely that the CPA would have questioned your numbers.

In addition, you are assuming that you are being audited because there was a "red flag" on your return. Its possible that you are being audited because of a "red flag", but its also possible that you are being audited simply because you hit the audit "lottery"....because you got randomly selected for audit.

The IRS has hired 15,000 new auditors in the last couple of years. For a good many years the IRS has backed off of auditing personal returns.....but the purpose of hiring those 15,000 new auditors is to get back into the business of auditing personal returns. As a result, lots more individuals are getting audited....and schedule C filers, are some of the ones at the top of the list.
 

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