Possibility of being audited??

Question

Michael Plaks · Answer

@Travis Buck

Not only the suggestion from @Yonah Weiss and @Paul Caputo is legitimate, it is the ONLY allowable method. Catching up with unclaimed depreciation is considered a "change in accounting method" and, as such, you're NOT permitted to fix it by amending past returns.

The correct procedure is to file Form 3115 with your next tax return and catch up with all missed depreciation at once. Completing this form is very tricky, and I highly recommend you leave it to a tax professional who has done it before.

Yes, there is some audit risk involved, but not much more than your usual risk of simply being in business.

Paul Caputo · Answer

@Travis Buck You don't actually have to amend your returns. You can file Form 3115 to catch up on missed depreciation. Amending would increase your chance of an audit, but the overall audit rate is very low. Depending on how many rentals you have and the cost basis of the properties it may be a good idea to have a cost segregation study done to get accelerated depreciation and maximize your deduction. If you have questions about it please feel free to PM me.

Yonah Weiss · Answer

I am not a CPA, so check with yours first, but I believe you are able to file a forms 3115 and 481a (change of method of accounting) which allow you to claim previous year's depreciation without actually amending previous years tax returns.

Paul Caputo · Answer

@Travis Buck @Michael Plaks You can file Form 3115 at any time. Most people like to file it with their tax return because they'll actually get a refund check if the adjustment is higher than the tax liability. If the adjustment isn't higher than your tax liability it doesn't really matter when it's filed because it'll just be credited against your tax liability.

Say you have an adjustment worth $50,000 with Form 3115 and you're paying taxes quarterly and your total annual tax bill is $100,000 with $25,000 due per quarter. You file the form and since it's granted automatic consent it's credited to the taxpayer account within 30 days. So from that point you have a $50,000 credit which would pay the next two quarterly payments. Pretty good deal. In this case the benefit isn't about getting a check it's about not sending a check.

My firm does engineered cost segregation which requires Form 3115 if the subject property was purchased prior to the current year, called a "look-back study". So I can confirm that it can be filed at any time and results in a credit unless it's filed with the tax return which can result in a refund check if the adjustment is higher than the current tax liability. Clients are always happy when they ask their CPA how much they owe and they can say nothing or much less than expected.

We don't recommend filing an amended return with Form 3115 because it isn't necessary and the increased audit risk. But keep in mind we've never had a client audited for amending with Form 3115 so it's a personal choice and depends on your risk tolerance. We've also only had a handful of clients amend out of thousands so it's not a good sample. Overall audits are around 1-3% so even if you increase that by 50% it's only a 1.5-4.5% chance of audit. I'd just take the credit and not have to pay the next few quarterly payments.

Michael Plaks · Answer

@Travis Buck

Yes, and I'd file it either with your 2018 tax return or with an amended 2017 tax return (if anxious to get the money and not concerned about slight audit risk).

I do not believe that you can file it mid-year, since it falls under the "automatic change" method. Even if you could - there is no benefit, as you will not get any money until the next tax return is filed.

Paul Caputo · Answer

@Travis Buck you have to file form 3115. It is separate from your return and you may file it any day of the year. You're changing from an unallowable depreciation method - not taking any depreciation and changing to an allowable method - taking depreciation whether it be straight line or MACRS.

Form 3115 allows you to catch up on all the depreciation you've missed and the IRS has 30 days to credit your taxpayer account after they receive it.

If you file it with your return you can get a refund check from the IRS if the adjustment is big enough to pay your tax liability. Any other day it's credited against your next tax payment(s).

Christopher Smith · Answer

That's difficult to determine. Filing of amended returns is probably not of itself going to make it more likely you will get audited. However, the nature of those amended filings could perhaps pique an interest in them and the original filings.

Do you feel you have significant exposure attributable to your original filings? If you are reasonably confident your original filings are solid (beyond the depreciation error) then why not amend for something you were clearly entitled to, and in fact must claim since your tax basis in the property will be reduced whether you claim it or not. Only you know these facts.

One item if you file an amended 2014 you are putting the government potentially at a disadvantage since the normal 3 yr statute of limitations could be expiring soon. This might result in a somewhat closer look or a request by the government for you to extend the time they have to review that year's return.

Basit Siddiqi · Answer

to take a business deduction - the deduction must be ordinary and necessary to your business. Depreciation qualifies as a business deduction.You do increase the chance of an audit with an amended return. However, if you have support for the deduction(HUD/closing disclosure) and a proper methodology of allocating cost to the property and land - you should be fine.

Possibility of being audited??

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