What are Your Rights During an Audit?

It is important that you know your rights during an audit so you do not become intimidated by the IRS representative, or divulge more information than necessary. The IRS is required to apprise the taxpayer of the taxpayer’s rights when dealing with the IRS. In order to comply with this requirement, the IRS has created updated versions of Publication 1, Your Rights as a Taxpayer; Publication 5, Appeal Rights and Preparation of Protests for Unagreed Cases; Publication 556, Examination of Returns, Appeal Rights and Claims for Refund; Publication 594, The IRS Collection Process; and Publication 1660, Collection Appeal Rights. Publication 1 should be included with the initial correspondence sent to the taxpayer. Publication 5 should be included with the 30-Day Letter.

If you are selected for an audit, you have the right to know why the IRS is asking for information. You also have the right to know how the IRS will use the information you have provided, and what will occur if you refuse to provide the requested information. During an audit, you should try to be as cooperative as possible. The IRS is likely to have access to information that you may feel is privileged, and your failure to provide that information will not deter the IRS from using other means to obtain the information by obtaining a summons or subpoena from a court of law.

• You have the right to have representation by an authorized representative.

• You have the right to have your information kept private and confidential.

• You also have the right to appeal any disagreements concerning the audit either within the various departments of the IRS, or in a court of law.

• You are entitled to receive professional and courteous treatment from IRS

employees.

If you believe that you were not provided with professional and courteous service, you should request to speak to the manager of the IRS representative, or seek the assistance of the Taxpayer Advocate (TPA).

Commonly Overlooked Deductions and Credits

Business Use of Home: One of the most abused deductions, as well as one of the most over-looked deductions is the use of a portion of your home for business. It is also one that can trigger an audit. That doesn’t mean that you shouldn’t take the deduction—it means that you must have it documented. If an audit occurs, you must have proof that the space is used for business.

This deduction applies to both self-employed individuals and W-2 employees. You may be able to deduct certain expenses incurred for business use of your home if one of the following applies:

• Your home was used exclusively and regularly as your principal place of business or used as a place to do managerial/record keeping-type tasks and there is no other fixed place where such tasks are performed.
• Your home was used exclusively and regularly as a place where you meet and deal with your clients or customers.
• You have a separate structure that is used for your place of business that is not attached to your home.
• You use your home on a regular basis for storage use.
• You use your home as a rental.
• You operate your home as a daycare facility.

You cannot deduct business expenses for any part of your home that you use for both business and personal purposes. Generally, your home must be the place where most of your time is spent in order to operate your business.

A W-2 employee may only deduct this expense when a part of the home was used exclusively and regularly to complete tasks related to their employment and for the employer’s convenience.

Deductible expenses for business use of your home includes: mortgage interest, real estate taxes, rent, casualty losses, insurance, utilities, maintenance and repairs, and depreciation. The amount you determine should be based on what percentage of the home is used for business purposes.

You cannot claim the full expenses if the entire home was not used for business purposes.

Be smart. Measure what portion is used. Take a picture of it. If there are utilities—gas, electricity, cable, etc.—then have those bills, along with the percentage calculation in reference to total square footage of your residence. Working out of the home is something that millions of Americans do on a daily basis—document what is used for tax purposes. In 2014, taxpayers may claim a standard deduction of $5 per square foot up to amaximum of 300 feet for the area used as a home office for a maximum deduction of $1,500.

This is an excerpt from Tax Relief and Resolution by Steven Melnick, CPA. Melnick is a licensed attorney, LLM in Taxation. He is also a professor of tax law, and a Chairman of Continuing Education Programs for Tax Professionals at the City University of New York.