Overcoming the IRS Audit That Incorrectly Attacks DeductionsTax Planning
My wife and I are being audited by the IRS for her miscellaneous expenses related to her job as a real estate sales professional.
The IRS examiner disallowed her miscellaneous expenses because she has
- no written statement that says those expenses were ordinary and necessary for her sales duties, and
- no listing of what expenses she is required to pay in regard to her employment.
The examiner indicated that to be considered valid, the policy or statement has to be dated for the tax year under audit and signed by an officer of the company.
Can you give us guidance on what should be included in the statement of what is “ordinary and necessary” and what she is required to pay as a self-employed real estate sales professional?
She is not reimbursed for any of her expenses.
Can you also tell me whether the IRS examiner, in referring to the officer of the company, means her broker at Coldwell Banker or my wife as the sole owner of her realty business?
You and this IRS examiner are living in the land of the blind. This is a case of either a big miscommunication or complete incompetence.
Let’s first get your tax return position in place. Your wife is not an employee. She is an independent contractor. As such, she is a sole proprietor business that reports her business income and expenses on Schedule C of her Form 1040.
The authority for her business deductions rests in IRC Section 162(a), which states, “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business ...”
To deduct the ordinary and necessary expenses, your wife does not need any statement signed by her or anyone else. And she does not need a separate list of such expenses as these are already listed on her Schedule C.
Perhaps your wife is expensing some assets that should be capitalized, and the IRS examiner is looking for the special $2,500 expensing election. Expensing in Place.
The special $2,500 expensing election is the only deduction we can think of where your wife would need a written statement to justify a sole proprietor business deduction for her one-owner, no-employee sole proprietorship.
To clear up this matter, consider making a copy of your wife’s 1099 and giving that to the examiner. If that fails, request to speak to the examiner’s supervisor.