The following are lessons learned or insights I discovered during my audits.
We Are Going to Audit You Next Year, Too.
As I’ve written about before, I was audited by the IRS last year. The audit was originally supposed to be on my 2007 medical expenses. But in the course of early discussions with my auditor, she said: “You will likely be audited on your 2008 return too.” She said I had the option of bringing my 2008 paperwork to the next appointment, or, I could wait for another IRS letter giving me official notice that they were diving into another year of my life. Be prepared for your audit to cover multiple years.
Audit vs. Examination
The IRS doesn’t use the word ‘audit.’ Instead, they refer to audits as ‘examinations.’ I guess it has to due with the psychological scariness of the audit concept. But I dislike examinations just as much. If you do any audit-related research, be sure to include “examination” as a keyword.
In preparation for my audits, I did a lot of research. I read tax law, talked to people who had been audited, and I executed extensive literature searches. When I presented my case to the IRS, I was shocked to see that I was more prepared and better informed than my auditor. She had never seen some of the IRS documentation I brought with me. It was sort of disappointing. But it was enlightening too.
Don’t Divulge More than Is Required
As part of my research, I read about my rights as a tax payer. One of my rights is that the auditor can only discuss the issue(s) outlined in the official written correspondence from the IRS. When I felt my auditor was doing a bit of “scope creep,” I steered her back by reminding her that this audit dealt with medical deductions. All other topics were off limits.
Do You Have Cancer?
If you’re a private person and don’t like to divulge personal details, it will be difficult to undergo an audit. Because my audit dealt with medical deductions, my auditor, upon first meeting me, said, “Okay, tell me what’s wrong with you. Do you have cancer or what?” Auditors aren’t known for their delicacy with language. They don’t use polite euphemisms or tiptoe around the issue; they jump right to the point. IRS auditors may inquire about your health, but their tone is not that of a family doctor. They are attempting to get money from you. This caught me a little off guard.
Health Insurance Reimbursement vs. Payments
The IRS seems to be acquainted with one type of health insurance model: patients pay the full amount at the time of service and are “reimbursed” by their insurance company at a later date. This is not how my health insurance works. When I see a doctor, I pay a co-pay. If I have a procedure or surgery, I pay nothing up front. After I’m home recovering, I receive a bill for the amount outstanding that the insurance company will not cover. Generally, my portion of the bill is about 20% of the total fee. So if I have an appendectomy that costs $15,000, I will have to pay $3000. During my audit the auditor and her manager kept asking me how much I was reimbursed. When I said “nothing,” they looked at me skeptically. To clear up this matter, I gave the auditor an overview of my health insurance payment plan. This document outlined the 80/20% deal.
How many times have you seen a doctor and during the course of your appointment, the doctor will recommend that you get an over-the-counter drug, a particular vitamin supplement, an herb, a cream, or even mention a great Acupuncturist who could help with pain management? This happens often to me. What I found interesting is that the IRS expects you to have written notes from your doctor saying, “I, Dr. X, recommend that my patient, Jane Doe, purchase a bottle of Advil at the local drug store.” The IRS will disallow medical expenses recommended by your doctor if you don’t have proof that your doc recommended them.
HMOs vs. PPOs
Is your insurance model an HMO (health maintenance organization) or a PPO (preferred provider organization)? The IRS is used to dealing with people who have HMO coverage. With an HMO, the patient has a primary doctor who coordinates and approves all appointments with specialists. With an HMO, you cannot go to a rheumatologist directly. Your primary care doctor must approve the appointment. But with a PPO, patients are able to coordinate their own doctors and specialists. I can call my rheumatologist and make an appointment and I don’t have to wait for my primary care doctor to make the arrangements.
I have problems with anxiety and depression, and I see a therapist as part of my treatment. I didn’t go to my primary doctor and ask if she thought therapy would be good for me. I knew it would be. Duh. The IRS doesn’t understand this. My auditor wanted to know why I would see a shrink on my own, without having a primary care doctor recommend it. The auditor was inclined to disqualify my therapy payments because the therapy was “patient initiated,” not doctor prescribed.
Let’s Make A Deal
One of the most shocking things during my audit was this: When I showed my auditor the piles and piles of paperwork and documentation for my 2007 audit, and we spent about 3 hours going over it, the auditor proposed a deal. Rather than review the 2008 paperwork and sit there for another 3 hours, she would offer me the same deal we struck for my 2007 audit. I told her that I’d like to think about it and contact her tomorrow with my answer. She said, “No, the deal was only good for the next 15 minutes.” They are wheelers and dealers! Be prepared to make a deal.
Penalties and Interest
If you do your own taxes and do not hire a tax professional, and if you are audited and owe the IRS back taxes, the IRS will levy penalties against you. Their logic is: Since you did your own taxes, you should have been doubly careful. Because you made a mistake, you’ll be fined/penalized for the errors. And in addition to penalty fines, they tack on interest.
Your Case Will Be Reviewed by My Manager
At the conclusion of my on-site audit, I asked my auditor if this was the end of it. To which she replied, “No.” I remember my heart sort of sinking. She said that my case would be handed up to her manager, who could choose to audit me on another section of my filings, or for additional years. In other words, be prepared for your audit to be “open” or ongoing for 6 months to a year.
If you’re audited and have questions, let me know if I can help.