Can You Be Outed By. . .

. . .An IRS Audit?



I was just watching a peculiar movie called "Stranger Than Fiction" in my hotel room while waiting on a gal and had a weird paranoid thought:

Would an IRS audit be so invassive that it would reveal my hobby activity (and the secret cottage industry I have crafted to hide play funds) to my SO or others?

Sorry for the buzz kill, but if some folks more familiar with the actual process could weigh in, it may benefit many of us. Thanks.

Anone, this seems like a legal question. Why dont you ask one of the most formerly prominent legal minds in the country--Elliott Spitzer

Not sure about the legal side--it is more about the auditor looking at us over his shoulders and as he is elbows deep in the paper-trail of out lives and saying,

"Gee, Mr. Gasten, can you explain all of these hotel stays within 25 miles of your home?"

"You sure do buy a lot of condoms."

"Why do you have two personal cell phones?"

In other words it isn't the lax laws I care about. . .it is the general snooping. You have no idea what happens until somebody starts flipping the rocks of your life over and looking underneath.

I was wondering if any providers or clients out there have been audited, and how invasive was the snooping?

Why would you use a credit card for a hotel room that would be audited?
I only deal in cash or use a card that is separate from my business.
Why would you save (and submit???) receipts for condoms and a hobby phone???

Dude, it's NOT a good idea to save all receipts and try for a deduction!
How much is the rest of your life worth to you?

::sigh::

Do you think it just takes a receipt in a shoe box for your stay to be recorded?

I am asking for INFORMED opinions from folks that have been actually audited, or from a hobbyist that is Internal Revenue Agent (hey they get horny too) what sort of things can be found and how are they found.

In others words what sort of things do we not even think about that leave evidence behind? What tools do they use for their investigation? If they see a huge gap between income and expenses (like the amount I indulge in my hobbying) does it bother them and do they go fishing to see where that lump sum is. If it isn't in your expenses or investments--where is it?

I am not talking about the things Captain Obvious Riday just mentioned.

Unless you are trying to deduct something that you spend on hobbying, I can't imagine how your expenditures would possibly come up (unless of course you were under reporting income elsewhere, in which case you should go to prison in any event).

(unless of course you were under reporting income elsewhere, in which case you should go to prison in any event). Originally Posted by TexTushHog

You are joking, right?

I'll start out by saying that I haven't undergone an audit myself.

However, an audit, it seems to me, would focus on the one year's (or multiple years') tax returns.

If you aren't claiming hotel stays, condoms or personal cells (your examples) as deductions, then they could care less about these receipts. If you are under-reporting your income, then there is a problem.

And, until we get to the place where every cash transaction requires the issuance of a W-9 or a like form (if the IRS starts the income trail in this fashion) to track income for the purpose of paying income taxes to mostly cash industries, then where you pay cash for services is not going to come up (Examples: taxi fares, waiter tips, concierge tips, tips to housekeepers at hotels, etc.). So, cash transactions to escorts should stay under the radar b/c no records are kept of these. Escorts are required by law to accurately report their income.

I would, however, avoid transactions that can traced, such as payment by credit cards, etc.

Sorry I broke your rule about who can reply, but this is a public board subject to opinions and thread drift. If you truly wanted a professional opinion on this, you should have seen a tax lawyer and paid the fee.

You are joking, right? Originally Posted by ANONONE

Nope, not one bit. I pay taxes on every penny I earn. And anybody that doesn't pay taxes on any substantial portion of their income needs to go to prison, in my opinion. We all reap the benefits of government programs equally, we all should pay our fair share. I have no sympathy at all for tax evaders. In my mind, they are among the lowest forms of criminals because they are not just stealing from one person, but they are stealing from every fellow citizen.

I was audited many years ago, at the time it seemed they were looking more into what I reporte as income than what I was deducting (I was/am self employed). What I learned from the experiance is 1 When you make money report it, and Round up not down. 2 What you think is an allowable expense probably isn't.

Cliff's Notes version: It is impossible to give you a useful answer without knowing a whole lot more about the specifics. Consult a tax attorney, pay for the advice, and share all the relevant information.

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I'm not an IRS agent, but I deal with a lot of them, including during audits. For what it's worth:

Would an IRS audit be so invassive that it would reveal my hobby activity Originally Posted by ANONONE

Almost certainly not. The audit focuses of verifying that claimed deductions were legitimate and that all appropriate income was included. All taxpayers have a lot of expenditures that are not deductible, but if you don't claim a deduction or a loss on the tax return, the IRS doesn't give a damn. Paid $30,000 this year to put in a pool? The IRS doesn't care. Spent $5,000 for a trip to Europe? The IRS won't ask. Theoretically, if you, say, volunteered the information that you'd spent $20,000 this year to hire a hit man to kill your business partner, they'd likely pass the information along. But if you didn't deduct it, they wouldn't ask about it, and you don't have to worry.

Don't just dump all your records on the auditor's desk. Respond to specific questions and requests; they will likely not disclose your hobby activity.

But see next section.

(and the secret cottage industry I have crafted to hide play funds) Originally Posted by ANONONE

It depends a lot on what you mean by "the secret cottage industry I have crafted to hide play funds." If you're talking about an off-the-books business that generates cash that you don't tell your family about and don't report on your tax return, yeah, that is exactly the type of thing the IRS would want to know about. [*] In fact, the single largest component of the so-called "tax gap" -- the difference between what the IRS should received under the tax law as written and what they actually receive -- is almost certainly not agressive tax planning, fancy offshore tax shelters, multi-national corporations with hordes of expensive tax lawyers, or "the filthy rich." It's small, Mom-and-Pop cash-based businesses that just take some of that cash under the table and never report it. Yep, those are the most typical "tax cheats."

The IRS would like to catch those folks, but it's not at all easy. The overall effort required versus likely return is not cost-efficient. The individual taxpayer like that is avoiding taxes, but not a huge amount; they account for a large portion of the tax gap only because there are so damned many of them compared to, say, the number of multi-national corporations with assets of $1 billion or more.

If you are selected for an audit, the IRS often just asks for substantiation of your deductions and then checks your income to, e.g., information returns from your employers, brokers, banks, etc. as to how much income you earned. If you run a business, they'll likely ask to review the business' accounting records. Definitely if you run a business, and maybe even if you purport to be a wage-earner only, they can and will get bank statements, brokerage account statements, etc. (possibly credit card statements as well, not to mention Ebay or PayPal) looking for deposits and making sure that all of them are "accounted for." If you have deposits of $150,000 shown in your bank accounts but report income of only $120,000, they'll require you to explain where the other $30,000 came from and they'll want documentation. Saying it was a gift or loan from family members won't be enough. Essentially, they start with the presumption that any accretion to wealth (e.g., deposit to your bank account) = income and you'll have to prove it isn't. So, if your bank statements include unreported income, you'll wind up having to pay tax (and penalties and interest) on it. And the audit result itself will raise the visibility and may lead to questions from SO and family.

But since this is money you're trying to keep secret, I'm guessing that you may arrange to get it in cash and keep it somewhere you can draw from it without the SO knowing. (A separate bank account she doesn't know about will come out normally in the audit; if they're suspicious, they can issue summonses to banks to identify any accounts in your name.) If it truly is cash, and there is no indication of it because it never touches a bank account, they probably won't find it. Unless:

1) An informant reports you to the IRS.

2) You're skimming off the top from an otherwise reported business, and in auditing the latter they see, e.g., that the reported income is disproportionately low compared to purchases, inventory, etc.

3) Law enforcement is already looking at you for some other reasons.

Any of those (and probably a few others) will lead to suspicion. And when the IRS gets suspicious, they can dig pretty hard. E.g., have a safety deposit box where you stash the cash? The government can find that by a summons to the bank and demand access. Or in some cases, where the reported income is very low compared to what you spend (whether in cash or not), they can do a "lifestyle audit/reconstruction" where they examine what you spend (whether deductible or not) and infer unreported income based on that. So they would look at your house, the cars you drive, your clothing, etc. and ask a lot of prying questions. Realistically, such audits are almost always limited to special cases. (It's how they convicted Al Capone. You can get away with theft, extortion, and murder, but cheat the tax man and you're in big trouble.)

The likelihood of an audit -- other than of the large corporations, which are audited thoroughly every damned year -- is fairly small. The likelihood of a more invasive audit (either because they're suspicious or you get hit for one of the National Research Project audits) is even smaller.

If you are audited, whether they're likely to turn something up which would be a surprise to your SO or family depends a lot on the specific details of that "cottage industry." Trading on eBay? Easy to find. Day-trading? Easy to find. Under the table sales from a business you report on Schedule C (or a separate corporation)? If they become suspicious, easy to find. Asking for extra money back on a credit card purchase, for something that you don't deduct? Unlikely they'll even look or care. Withdrawals from the ATM that you don't mention to your SO? Unlikely they'll even look or care -- it's deposits into your bank accounts, rather than withdrawals, that they're concerned about.

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[*] If you are reporting that income on your tax return, but your SO isn't aware of it, the audit could create a problem. If you tell the IRS "I earned $30,000 from trading on eBay, for which there was no information return, but here is where I reported it on the return" . . . the IRS is happy. But if your SO wasn't aware you were doing that, and asks what happened to the money you earned, you still have a problem.

And besides, unless you file jointly, who would they be outing you to?

Mostly, the IRS's remedies consist of denying a deduction, forcing you to pay additional taxes, plus interest. Or determining that you under-reported income, assessed an additional tax plus interest.

Extremely few of these cases are referred to the US Attorney for prosecution. The bar for prosecution is high, and there are a number of hoops through which the IRS must jump before the US Attorney will prosecute.

So being "outed" is pretty far fetched, IMHO.

And besides, unless you file jointly, who would they be outing you to?

Mostly, the IRS's remedies consist of denying a deduction, forcing you to pay additional taxes, plus interest. Or determining that you under-reported income, assessed an additional tax plus interest.

Extremely few of these cases are referred to the US Attorney for prosecution. The bar for prosecution is high, and there are a number of hoops through which the IRS must jump before the US Attorney will prosecute.

So being "outed" is pretty far fetched, IMHO. Originally Posted by charlestudor2005

Very few cases are pursued for criminal prosecution; it has to be pretty damned egregious.

Normally they can only share information with the taxpayer and an authorized representative; there are strict penalties for disclosing information to others. But they can supply information to other federal or state enforcement agencies if they run across indications of violations of other laws. But realistically that's rare too. Tell them "I spent that money, but didn't deduct it, on hookers at an AMP that uses trafficked girls" -- you'll hear from LE. Tell them "I spent that money gambling, but didn't deduct gambling losses" -- they won't care, but they won't ask in the first place, so why are you telling them what you spent it on???

I assumed that the fear of outing was because it was a joint return, and his wife is involved in dealing with the auditor to some limited extent. Outside that, or unreported income or improper deductions, there's not a lot of risk of "outing."

The IRS formula is simple (my personal knowledge both pro and con personal experience as individual and business owner). IRS wants to know: -- how much you earned (and they could care less how, even if illegal) and, usually where you earned it, be it stateside or foreign, and the IRS does share individual and business taxpayer data with the state taxing departments and there are multiple tax treaties with foreign countries. -- substantiation of claimed deductions (expenses) -- proper accounting of federal and tax payments (e.g., if you have made estimated tax payments if required. The basic advice of your tax attorney, btw, is "stay off the IRS radar. And if you ask your CPA or your tax attorney for advice on avoiding, not reducing, taxes, if it appears anyway illegal, they are required to report you to the IRS. If your lifestyle closely matches your "indicated" (reported) income, you are doing a good job of staying below the radar threshold. If you are lucky enough, as indicated, to have a separate stream of income hidden away from family, imo you should be reporting that income, and the deductions that go with it. Not worth the trauma otherwise. Having said all that, you asked about IRS "tools" of which they have plenty. Access to damn near any data ever compiled by you, on you, about you. Your property taxes, your real estate holdings, your rides, planes and airline travel are all hiding out there in plain sight somewhere and the "interested" inquisitive revenue agent knows exactly where to look.

And if you ask your CPA or your tax attorney for advice on avoiding, not reducing, taxes, if it appears anyway illegal, they are required to report you to the IRS. Originally Posted by ck1942

Tax avoidance is legal, by the way; tax evasion is not.

As far as the requirement to report the taxpayer? That's not exactly correct, as far as I know.

The standards of professional responsibility for practice before the IRS (Circular 230) require the CPA or attorney to respond to requests for documents and information, unless privileged. If clearly illegal, it may or may not be privileged depending on the circumstances. But even then, the CPA/attorney only has to respond to requests and can't actively mislead, but is under no obligation to proactively inform the IRS.

And if the CPA or tax attorney "knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission."

So, we tell them they should report truthfully and what can happen to them if they don't. But we don't have an obligation under Circular 230 to report it ourselves. (Although we can get in trouble if we prepare and sign the false tax return rather than just giving the client advise.) And doing so may violate other professional obligations to maintain client confidentiality.

For example, under the Texas State Bar's Disciplinary Rules of Professional Conduct, the lawyer has to maintain client confidentiality unless it falls within the appropriate exceptions. Those include:

• When the lawyer has reason to believe it is necessary to [disclose to others] in order to prevent the client from committing a criminal or fraudulent act.
• To the extent revelation reasonably appears necessary to rectify the consequences of a client's criminal or fraudulent act in the commission of which the lawyer's services had been used.

If the taxpayer asks the attorney before having filed the tax return, the first exception potentially applies, but probably only if it appears that the client is going to go through with fraud despite our advice not to. If the taxpayer asks the attorney after having filed the tax return, there is no obligation to disclose unless the attorney helped the taxpayer commit fraud with that tax return.

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Compare to a criminal defense attorney. If a client comes to me and tells me he's going to kill X, I may have to report that to LE. If a client comes to me and tells me that he already killed X, I can't knowingly allow him to commit perjury on the stand, but I'm under no obligation to go tell the cops that my client admitted killing X. If I do, I'll likely be disbarred.