I am currently being audited by the IRS. The agent has prepared a preliminary report showing a tax owed of about $7,000 for the tax years 05 and 06. She has also computed interest and penalty. I argued against both, because I was previously audited, twice, in tax years 2000, 01 and 02 and received a “No Change” letter and an Income Tax Examination Report that resulted in zero Balance Due. The earlier audits were completed in 2004, just before the tax years now in question. The tax owed relates to depreciation on the business expense claimed for the use of my company’s boat. I am a sole proprietor and file a Schedule C. The prior audits looked into those expenses and did question, but did not deny them. The current agent says that she is willing to withdraw a claim for penalties because of the prior recent audits, but she says she cannot withdraw the claim for interest. She stated that the IRS software won’t even allow her to zero out the interest. In your experience, can or has the IRS withdrawn a claim of interest on taxes owed. Thank you in advance for your reply.

In my 17 years experience, the IRS has frequently waived penalties as a result of an adjustment from an audit! I have found that in most cases, the taxpayer can claim prior years compliance of tax filing and paying all the tax liabilities in a timely manner would usually result in the penalties being waived!

But, it is very rare, except in an adjustment that is considered "de minimis", (that is, not very significant), the IRS will waive both penalties and interest. But, in most cases that an audit adjustment resulted in interest charges. The IRS agent is correct in saying that the Interest is commuted by the computer software program. This amount is rarely waived.

So, in my experience, it would be best to pay the interest portion, as fighting it in most cases would not be productive!

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TaxGuru,
Thank you for your prompt reply. This is a great site and resource. Another Q: I am a securities trader and have received trader status. I trade from my office, which is 1995sf. The agent has visited my office and questioned the size and facilities. I don't think the agent doubts that there is no personal use of the office. However, she does question the size and facilities. It has restrooms, reception area, conference table, workstations, and a pool table (which I use for a little "rest and relaxation" not unlike an employee lounge. While it is true that some traders operate in smaller spaces (many trade from an office in the home), this space is convenient for me and the cost is very reasonable, since I own it outright. The cost is about $1,100 per month. If I were to try and relocate to another space in my city, most office suite rentals, or even studio apartment rentals with the internet access I require, would cost more than my current space, and not be as convenient. Do you think I have an argument on the "ordinary, necessary, and reasonable" test to argue cost - rather than size? Thank you again for your reply.

We appreciate your positive comments on the website. We are attempting to do our best, but, it is still developing and we have just completed our 1st year!

Now to answer your question, you could argue with the Agent regarding the personal use of the office till the "Cows come home", but the Agent may not budge, and suggest that indeed that you are using the office for personal purpose as evidenced by the game room! ! In fact the whole audit could become quite contentious.

I think that you should propose to her that perhaps she grant you 80% business usage, and that you accept a 20% disallowance. Further, I would also urge the Agent to waive any penalties and interest (though I don't think she may) from the additional income generated from the non-deductibility of the deduction of the rent due to personal use!

The reason why I you should claim at least 80% for business use is that you can always claim that you have multiple clients at a time, and that clients are required to use the waiting room! You use the conference rooms for multiple related clients, and of course the rest room is used 100% for business!

A portion of the room, that is the pool table room is used for personal recreation at times, and this is what you should agree to being used for personal use!

Good luck! Let us know how the audit was resolved.

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