My experience getting audited by the IRS, and my lessons learned

November 28th, 2012

I think my caseworker from the IRS was confused when I told her I’d been thinking about her, but the truth was, I had. She called this afternoon with what were the details in what would be the final round of 20 months of negotiations concerning my 2009 tax returns.

We started with the IRS claiming I owed them $5,000, and we ended at $1,500. Once they got a hold of my bank statements they really went to town, and most of that $1,500 is refunds of downpayments I paid on property, that I had no paperwork for.

This advice goes to everyone who has non-W2 income coming in, which is primarily freelance income but could also include payments from Google AdSense, AirBNB, or money your friends paid you back: If you don’t keep a separate account for that income and you get audited, be prepared to get boarded. You’ll have to explain everything.

The weirder things that happened during this process:

  1. The first IRS lady was absolutely certain that the first-time homebuyer credit I had gotten had expired, and couldn’t be claimed. I emailed her a couple news articles to change her mind.
  2. The IRS requiring a transcript from my college, which I graduated from in ’99, to prove my student-loan interest deduction was reasonable.

The mistakes I made:

  1. At the end of the process (i.e. today), if I had declined the IRS’ final offer, we would have met in a courtroom next month. I took the first number at face value without negotiation. Never take the first number.

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