OT IRS tax examination (ie U owe us 11k)

[jimcav]

Anyone have this tax examination by mail process happen to them? I just got an IRS letter saying I owe them over 11k for 2007 (with fees/penalties/interest). In the computer age why wait over a year???? I guess so you can charge over 1800 in fees/interest. Seems when i did turbo tax i just did what turbo tax asked and it put in my mortgage interest in 2 places (normal and rental) and the irs decided to take out one. SO i am trying to amend my return but the irs letter says pay now and figure it out later to avoid continued interest/penalties. But i fear if i pay i won't get anything back even if i can show it was a simple/honest error.
appreciate any advice, and if not please check the classifieds soon for my vanilla (seriously) (or someone buy my corima wireless powertap set up)
thanks
jim

[goonster]

put in my mortgage interest in 2 places (normal and rental) and the irs decided to take out one.
You deducted mortgage interest both for your residence and another property that you rent out?

[Idris Icabod]

We've had these letters twice now over the past 4 years. The first one (tax year 2004) they wanted $24K because the gain we made on stock options was incorrectly handled by our tax preparer, H & R Block. H & R Block were unable to figure out how they screwed up so they simply gave us our preparation fee back and sent us on our way (they are totally incompetent and didn't inspire any confidence), so we paid a tax attorney slightly more than $1K to sort it out and to show we didn't owe anything. Then about a month ago we got another letter demanding about $10K from tax year 2007. These I had done myself via turbotax and it was the same problem with working out cost basis on stock sales. Again I paid the same accountant a little more than $1K and he re-did my taxes and found I underpaid by $19 (not thousand), and the IRS agreed and I just yesterday wrote an additional check for $70 for interest and penalties. Next year I am just going straight to the tax attorney!

I didn't pay upfront (mostly because of the sums involved just like your $11K and also because I was sure that I didn't owe this money). If you do owe it then you will have to pay but you are going to incur penalties whatever, paying now will just reduce the amount of interest you owe, but it will be about a month of interest so probably not a vast sum.

Good luck, the IRS scares the $hit out of me!

[rwsaunders]

Find a CPA who handles IRS disputes. The IRS is like the UCI...you're guilty until proven innocent.

[XTC]

Unfortunately the IRS does not care about simple/honest errors- why should they?

[slowandsteady]

1+ on what RWSAUNDERS said.

I have also found over the lat several years that a simple call to the IRS has been very helpful. They have changed their Customer Service profile and often the CSR you get is actually willing to assist you. Play dumb, ask questions and act innocent (you probably are). Remember your call IS being recorded. Ask for an extension to hire a consultant and ask if they can freeze the penalties while you do so...I have had good luck and so far always had a good resolution to disputes. I try on my own forst and then call my tax preparer/accountant if i cannot resolve the issue.

Good luck and keep your cool no matter how frustrated you get.

-Matt-

[Ken Robb]

I don't know much about tax law but I think the interest you paid on rental property is deductible along with maintenance, property taxes paid, etc. against the income derived from that property. Did you file a Schedule C for the rental property?

BTW, Rick Evans is a CPA in the UTC area is a good tax expert and a really nice guy.

Doug Jennings is a big-time tax lawyer in the same area.

Bob Regnery is the best tax guy known to my brother-in-law who is a CPA himself. Also in UTC.

[znfdl]

1+ on what RWSAUNDERS said.

I have also found over the lat several years that a simple call to the IRS has been very helpful. They have changed their Customer Service profile and often the CSR you get is actually willing to assist you. Play dumb, ask questions and act innocent (you probably are). Remember your call IS being recorded. Ask for an extension to hire a consultant and ask if they can freeze the penalties while you do so...I have had good luck and so far always had a good resolution to disputes. I try on my own forst and then call my tax preparer/accountant if i cannot resolve the issue.

Good luck and keep your cool no matter how frustrated you get.

-Matt-

I agree, a call to the IRS saved me a major headache when I took my money out of an employer based retirement fund and tranferred it to an IRA. The IRS considered it as income, go figure.... One phone call and a fax and I was good to go.

Just call and ask questions and be polite.....

[jimcav]

yes i input info into turbo tax, it asked for mortage interest paid, and later also for mortgage interest in our other house we rent out. it never said "don't enter mortgage intetrest on your second home or rental", etc, anyway, so i see now i need to separate it, but the irs just incorrectly wiped the rental mortgage interest part--so now the home i rent for hundreds less than the mortage: they see as earning me an additional 37k.

anyway, thanks much Ken for the local names--i hope i can just re-do the return and owe them something but not 11k but it is nice to knwo there are local guys who might be able to help/advise
jim

[MattTuck]

http://www.youtube.com/watch?v=n-kfrUv9vtc

I think it might be a scam.

[MtnBikerChk]

People FREAK out when they get letters from the IRS. I deal with it everyday. Don't panic. It takes YEARS to actually put a lien on your assets LOL (Ok not funny but true).

If you know exactly what happened then just write them a letter and include proof that you are right. And be patient - they are backed up so it could be a while to hear back. You can call them first but I would always follow up with a letter.

If you don't, then bring it to a CPA.

I've cleaned up many many an H&R Block mess.

Good luck.

MBC, CPA

oh, and personal residence mortgage interest is deductible on schedule A and mortgage interest on a rental home is deductible on schedule E (assuming those are the facts - that there are indeed 2 separate mortgages). Be sure to pick up rental income too.

[Louis]

You deducted mortgage interest both for your residence and another property that you rent out?

As far as I know it's perfectly legal to deduct mortgage interest (and taxes) on both your primary residence and a second home.

If anybody knows something different, please explain...

More: IRS Pub 936 (http://www.irs.gov/publications/p936/ar02.html)

Part I. Home Mortgage Interest

This part explains what you can deduct as home mortgage interest. It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return.

Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.

You can deduct home mortgage interest if all the following conditions are met.

*

You file Form 1040 and itemize deductions on Schedule A (Form 1040).
*

You are legally liable for the loan.
*

There is a true debtor-creditor relationship between you and the lender.
*

The mortgage is a secured debt on a qualified home in which you have an ownership interest. “Secured debt” and “qualified home” are explained later.


You cannot deduct interest you pay for someone else if you are not legally liable to pay it. Both you and the lender must intend that the loan be repaid.
Fully deductible interest. In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.

If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category.) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct.

The three categories are as follows.

1.

Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
2.

Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2008 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
3.

Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2008 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.

See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt.

You can use Figure A to check whether your home mortgage interest is fully deductible.

This image is too large to be displayed in the current screen. Please click the link to view the image.

Figure A. Is My Home Mortgage Interest Fully Deductible?

Secured Debt

You can deduct your home mortgage interest only if your mortgage is a secured debt. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:

*

Makes your ownership in a qualified home security for payment of the debt,
*

Provides, in case of default, that your home could satisfy the debt, and
*

Is recorded or is otherwise perfected under any state or local law that applies.

In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. In this publication, mortgage will refer to secured debt.
Debt not secured by home. A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien).

A debt is not secured by your home if it once was, but is no longer secured by your home.

-----------------------------------------------------------

Qualified Home

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.
Main home. You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home. A second home is a home that you choose to treat as your second home.

Second home not rented out. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.

Second home rented out. If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527.

More than one second home. If you have more than one second home, you can treat only one as the qualified second home during any year. However, you can change the home you treat as a second home during the year in the following situations.

*

If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it.
*

If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home.
*

If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home.

Divided use of your home. The only part of your home that is considered a qualified home is the part you use for residential living. If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. (See Home Acquisition Debt in Part II.) Dividing the fair market value may affect your home equity debt limit, also explained in Part II.

Renting out part of home. If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply.

*

The rented part of your home is used by the tenant primarily for residential living.
*

The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities.
*

You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant.

Office in home. If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest.

Home under construction. You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.

The 24-month period can start any time on or after the day construction begins.

[CNY rider]

Strange but true story coming.

I've dealt with two of these in the past few years.
First one came in a big thick envelope from IRS. I opened it, saw a statement that we owed $25,000 and almost needed to change my underpants. Envisioned standing in stockade in the town square wearing only a barrel, etc.

First thing next morning called my attorney (also a CPA), who told me to calm down. We went over it and it was clear I didn't really owe very much; it was the IRS not understanding some of my short sales of stock and options, and me forgetting a couple of minor entries. My attorney told me I could actually handle it myself by doing just what was advised in the posts above; writing a letter and filling out the form with supportive documentation. I was way too scared for that, so for a few hundred frn's he filed an amended return, and showed I owed a few hundred frn's to the IRS which I promptly paid. End of that story.

Following year, big IRS envelope comes, this time we owe $75000, on the next year's return! I go over the documents, see it's the same non-issue and decide to handle it myself.
The funny part: After a few rounds of back and forth with the IRS, they end up sending ME a CHECK for about $800.

So just relax, get some qualified help and you will be able to move on.

[jimcav]

I appreciate it, i am working the issue
jim

[endosch2]

Just get a good CPA. I have been through the same - IRS said I owed them - they ended up sending me a check for $8 once it was done.

Oh, and one more comment - there are CPAs who are very proactive and will act like a personal CFO and there are also CPAS who are shy, credentialed glorified bookkeepers. Pick the former.