How I Saved a Client $154,000 in an IRS Audit with this #KnowYourNumbers Strategy
Yes, it’s tax time!! For those of you that are self-employed, this week’s tip may save you thousands as well. I'm going to share one area that many people overlook, but is high on the IRS’s radar!
TRUE STORY
One of my long-term clients, a real estate investor, owns several buildings, has several entities, and has seventeen bank accounts with daily deposits, checks, and transfers. One year, this client was audited by the IRS. The audit took months due to the complexity of the return, but I was confident that everything would be fine for my client. Imagine my surprise when they received a bill for $154,000 in unpaid taxes!
THE PROBLEM
There is a concept, “Unreported Income” that is actually a form of tax fraud which garners significant tax penalties and may even result in jail time. In a nutshell, if you are audited, the IRS will look at all deposits in your personal and business bank accounts and consider them taxable income unless you can prove otherwise. Here’s an example just to illustrate:
Total of all deposits/transfers into bank accounts: $800,000
Less: Total gross income reported on tax return: ($300,000)
Potential Unreported Income $500,000
This $500,000 will be subject to taxes, interest, and penalties unless you can prove that the amount was not actually taxable income! This is how my client received a bill for $154,000.
THE SOLUTION
This is where #KnowYourNumbers comes in. I teach how important (and simple!) this is in my courses, especially the Quickbooks Online Course. I practice what I preach for myself and my clients and this time it really paid off.
In my client’s case, I was able to track and support every penny of the “Unreported Income” the IRS proposed. There were many deposits into their accounts that were not income! Examples included proceeds from refinances, repayments of loans outstanding, transfers from other accounts, inheritances, and even proceeds from insurance settlements.
All I had to do was export the ledgers from Quickbooks, email them to the IRS Auditor, she checked a few of the transactions with supporting documentation (which of course I had!), and the case was resolved with no additional taxes due.
I’m sharing this because not being able to identify the DEPOSITS in bank accounts is one of the most common errors I see clients make, and it can be very costly in the event of an audit, or on the flip side, if you erroneously count all of your deposits as taxable income, even though some are legitimately non-taxable, you will actually overpay what is due.
YOUR CHALLENGE!
Take a look at all your bank deposits in all accounts for the last three months. Can you clearly identify what they are for and if it is taxable income or not? If you aren’t sure, you have some work to do, ESPECIALLY if you use ApplePay and Venmo! Those systems do not offer any clarity on who the transfer is from on your bank statements! This is why I recommend using payment platforms such as Zelle instead since it offers more information.
Good luck and I hope this helps you! Please forward to anyone you think can benefit!