When am I safe from being audited?

[alligatorob]

Florida

In 2005 we had substantial hurricane damage to our home and took a large tax deduction. We worked with our preparer to take as much deduction as she felt was legally defensible. However I worry that taking such a big deduction will trigger an audit, and if we are audited I fear the IRS may disallow at least some of the deduction. So we banked the money we saved on taxes and am sitting on it just in case. My question is how long do we need to wait to be safe from being audited?

The losses occurred in 2005 and I took the deductions in my 2005 filing which was submitted in 2006. However since the deductions exceeded my income in 2005 and 2006 the net loss was carried forward and into the 2006 and 2007 tax years. As a result I paid no taxes in 2005 or 2006, and still had a good deduction in 2007.

So how long do I need to worry about an audit and how long should I sit on the cash I saved?

[tranquility]

SOL's can be difficult and are based on the facts. In general, for your situation where there was no intent to cheat, it is three years. However, since you are using the deduction currently, the IRS can still go back to the generation of the loss up to three years after it is last used.

[davew128]

The irrational fear of an audit regarding a legitimate verifiable deduction never ceases to amaze me. Last month I had someone absolutely insistent his written statement regarding IVF expenses be attached to the return to reduce the odds of it being audited. This despite the fact that IVF expenses were determined long ago by the IRS itself to be deductible.

[alligatorob]

So am I at greater risk of an audit with a deduction like this? Do you know if the IRS is looking more closely at these big casuilty losses or am I likely to go unnoticed because of all the other big hurricane losses in 05?

Tranquility, not sure why this is irrational fear, it is fear of the unknown. Normally my deductions are not so large and in a normal year if I am audited and lose something I could afford to pay it. But this deduction is so large that if I lose it I would be in a serious financial bind without that cash sitting in the bank. Now I would much rather put the money into a less liquid but more enjoyable asset, like say a new boat, but that would be hard to cash in to pay a tax debt.

[LdiJ]

Originally Posted by alligatorob

So am I at greater risk of an audit with a deduction like this? Do you know if the IRS is looking more closely at these big casuilty losses or am I likely to go unnoticed because of all the other big hurricane losses in 05?

Tranquility, not sure why this is irrational fear, it is fear of the unknown. Normally my deductions are not so large and in a normal year if I am audited and lose something I could afford to pay it. But this deduction is so large that if I lose it I would be in a serious financial bind without that cash sitting in the bank. Now I would much rather put the money into a less liquid but more enjoyable asset, like say a new boat, but that would be hard to cash in to pay a tax debt.

I don't think that your chances of being audited are any greater than anyone else's chances. You are one of MANY hurricane victims. As long as you have good documentation, I wouldn't worry about it.

However, as much fun as it would be to spend the money, there is a great benefit in having a chunk of savings put by for a rainy day. Keep that in mind.

[tranquility]

Although I didn't write "irrational fear", I agree with davew128. Is the deduction good? Do you have the proper substantian for it?

If so, who cares if they audit you?

[davew128]

alligatorob, you need to realize a couple things here.

1) Likelihood of an audit cannot be considered (at least acknowledged) by a recognized tax professional in the planning or tax preparation process. It's written into Circular 230, which is sort of a bible for tax professionals.
2) If your deduction is legit and documented, your audit will be over in 30 minutes. Seriously.