The IRS and Your Home

Do I have to let the IRS into my home?

Unless the IRS has a court order to enter your home, which is pretty rare, it is illegal for them to enter your house without an express invitation from you. During a field audit, the auditor will request to enter your house to discuss your audit or to verify deductions such as a home office. You can forbid them to enter, but it is more likely than not any home-related deductions you claim will be disallowed. If you don’t want the auditor in your home, seek professional representation and have the meeting held at your attorney’s office.

Can the IRS take my house?

The short answer is yes.

Unfortunately for taxpayers, the IRS is authorized by the Internal Revenue Code to seize a house or a business. The IRS has access to almost anything you own in order to collect back taxes, including your home. While the IRS can go right on ahead and take money from your bank account or wages, there is a process the agency must go through before acquiring your home.

The procedure of seizing your home depends on the size of the case. If you owe less than $5,000 in back taxes to the IRS, it is illegal for them to take your home. Before they even consider taking such a drastic step, the IRS must determine the equity of your home. If the equity of your home will not produce significant funds, they won’t even consider seizing it. Equity is determined by the quick sale value of your home which is a 20% reduction of the full market price. For example, if your house is worth $350,000 and the mortgage on it is $350,000, there is no equity in the house home and the IRS won’t seize it. On the other hand, say you were to owe $335,000 and the quick sale value was $370,000? The IRS is permitted to seize the house and use the remaining $35,000 to put towards your debt. The final hurdle the IRS must jump through in order to obtain your home is to get a court order from a U.S. District Court Judge or Magistrate. While the IRS can go directly into your bank account unchecked, they must get permission before taking your home. Once approved, the IRS will then padlock your house, post notices to the public, and sell any assets to the highest bidder.

It’s important to note that if you have already made a payment plan such as a pending Installment Agreement or an Offer in Compromise with the IRS, it is illegal for them to seize your residence.

If you owe money to the IRS, don’t expect them to immediately claim your home. Home seizure is a last resort for the IRS that usually results from uncooperative taxpayers. If you are being audited, owe money in back taxes, or are in fear of losing your home to the IRS, contact the Law Offices of Jef Henninger for professional assistance from lawyers who work aggressively to ensure the best possible outcome for our clients.



What documents will the IRS want to see?

Don’t wait until the IRS audits your return to start collecting and organizing your financial records. Keeping track of documents such as receipts and payroll reports can mean the difference between sufficiently substantiating your claims and having to pay hefty fines.

The IRS is going to request different documents for different situations. For example, if you’re running a small business and you deduct your travel expenses claiming they’re business-related, the IRS is going to want to see a mileage log and receipts for gas and lodging. You will also have to provide some proof that the travel was business-related. If you vacation in Cancun and write it off as a business expense, that’s called fraud. If you have the documents to show that your trip was to meet with a client, however, this would be a legitimate deduction.

The Information Document Request

For any taxpayer unlucky enough to be audited, it will be impossible for them to know what documents the IRS wants to see until they receive an Information Document Request (IDR) in the mail. The IDR, also known as IRS Form 4565, usually arrives with an audit appointment letter that details what steps need to be taken.

The IDR itself is a list of specific documents the taxpayer must gather in order to substantiate questionable items on their tax return. The number of IDRs sent to the taxpayer depends on the type of audit and its complexity. Sometimes, the IRS only needs to verify one item and can settle the audit after one IDR. In more complex cases, you may have to gather a variety of documents from an initial IDR, meet with the IRS in person, then receive more IDRs to support what was discussed at the meeting.

The Information Document Request will list out all specific documents you must deliver to the IRS for examination. The documents vary on a case-to-case basis, but frequently requested items include:

  • General ledger
  • Copies of  loans, leases and material contracts
  • Cash disbursements journal
  • Accounts payable ledger
  • Trial balance
  • Financial statements
  • IRS Forms 940, 941 or 944, 945
  • Forms W-2
  • IRS Form 1099
  • Collective bargaining contracts with employees
  • Loan statements
  • Bank statements
  • Cancelled checks
  • Receipts
  • Listing and invoices for fixed asset purchases
  • Payroll reports

Once you finish reading your IDR, you should begin gathering the requested documents as soon as possible. Be sure to make copies and to never send in the original copy. If you can’t find a specific document, get in contact with whoever originally issued the document immediately and request a duplicate. The IRS doesn’t accept missing documents as an excuse. Do not ever send the IRS more information than they asked for, this will only come back to haunt you if the IRS finds another mistake.

If you are being audited, you don’t have to go at it alone. The Law Offices of Jef Henninger work aggressively to assure our clients the best possible outcome from their audits.

How long can the IRS audit me for?

Fortunately for taxpayers, audits don’t last forever and the IRS cannot audit a tax return from any year they want.

In most circumstances, the IRS generally audits tax returns within the past 2 years. The Internal Revenue Code, however, provides a statute of limitations that allows the IRS to audit any return within the past 3 years. For example, if you received a notice of audit in 2016, the IRS can audit a return filed in 2013, 2014, and 2015.

There are a few situations in which the IRS can audit tax returns older than 3 years.

Omission of Income

If the IRS finds that a significant amount of gross income, 25% or more to be exact, is missing from a return, then the statute of limitations is extended. The IRS will then have 6 years to audit that return.

Return Not Filed

If you do not file a tax return for a given year, the IRS does not have a time limit to audit or tax you for that year.

Fraudulent Return

If the IRS finds evidence of fraud or intent to evade taxation within a tax return, they do not have a time limit to audit or tax you for that year.

The Taxpayer Agrees to Extend Statute of Limitations

If an audit is not resolved in time, you may be asked to extend the statute of limitations in order for the IRS to assess additional tax. Agreeing to extend the statute will allow you more time to gather more documentation to substantiate your claim, appeal if you do not agree with the audit results, or to claim a tax refund. You should think carefully before you agree, however. Extending the statute of limitations also gives the IRS more time to complete the audit and find something potentially damaging to you

You can extend the statute of limitations by filling out an IRS Form 872 which extends the audit to a specific date or a Form 872-A that extends the audit indefinitely (this can be revoked by submitting a Form 872-T).

The amount of time each audit takes varies and is dependent on the complexity of the case, the availability of documents, scheduling, and whether or not the taxpayer decides to appeal. Auditors are advised to complete audits within 28 months of the date you filed your tax return or the date it was due, whichever was later. The IRS is legally allowed 36 months from the date filed to close an audit, but the additional 8 months are to spare time for the appeals process.