Tom Copeland has made some IRS Audit Resources Available for family child care providers and tax professionals representing them on his Taking Care of Business Blog.
Here are his comments on a 2007 child care provider audit situation:
When the IRS audited family child care provider Kay Gillock last fall, there were two main issues in dispute: how much space in her home did she use in her business, and how many hours did she work in her home. Kay claimed she used 98.87% of the space in her home and worked 84.8 hours per week (50.3%). When the auditor issued his report that allowed only 57.31% of her space and 44.4% of her time, Kay fought back--and won.
The way that Kay responded to the IRS report is a textbook example of how to make a case to the IRS in an audit. With Kay's permission we have made the IRS report, her response to the report, and the IRS letter that conceded these two issues available on our Web site as a downloadable PDF. Family child care providers can learn much from these documents on how to prepare their own audit defenses.
Read the entire article for all the details, but be sure to observe these remarks:
After receiving Kay's letter, the auditor's supervisor issued a new report five months later. A letter accompanying the new report said, "This report is the result of extensive research on the part of the examiner and myself and discussions with Internal Revenue Service District Counsel. As you will see in the report, we have conceded the issues of square footage of the home allowable as business use and the amount of time spent working on your business per day."
In other words, it was reasonable for Kay to use practically all of the rooms in her home for her business, even though she had 3-5 children in care. In addition, Kay's 85 hours of work per week were also deemed to be reasonable. Although her work hours were higher than the average provider she kept careful records to back up her claim. I strongly advise providers to keep at least two months a year of detailed records of the hours worked. The longer the hours you work the more detailed your records should be. Kay's detailed records made a difference in her case.
Although individual audits cannot be used as precedents in other cases, Kay's audit is instructive. The IRS did check with District Counsel, who backed up Kay's position. This gives weight to other providers who take a similar position to Kay's. The IRS did not provide any written authorities to support their bogus claim that it was not necessary for Kay to use all the rooms in her home. Providers and tax professionals should not be afraid to forcefully respond to an audit report with their own additional facts and authorities.
Tom Copeland concludes:
I am happy to assist providers and tax preparers with IRS audits. If you need help, please contact me at 651-280-5991 or firstname.lastname@example.org.
Last updated: 7 July 2011