IRS auditors can and do make mistakes.
This can happen when they don’t understand the business of family child care.
Last week a family child care provider from California called me about her IRS audit. Her auditor told her:
“You can’t count a room as used for your business if there is a mattress in the room that could be used personally.”
“I’m denying some of your food deductions because you could have spent less on food by purchasing macaroni and cheese.”
“I’m disallowing your $5,000 deduction of furniture because you could have purchased more inexpensive furniture.”
All three statements are false. The second two are also insulting to family child care providers.
There is no rule that says you can’t count a room as regularly used when there is a mattress in the room! All other home-based businesses must use a room exclusively before it can be counted. Family child care is the only business that can count a room that is “regularly” used for their business. Regular use is generally defined as used two-three times per week for business. So, even if a family member slept on the mattress every day, the room could be counted as business use if it was used regularly for business. In this case the child care children used the room every day.
Macaroni and cheese! Obviously, providers must serve nutritious food if they are on the Food Program (which this provider was). More importantly, the IRS has no business telling providers they must buy the cheapest food available! When providers use the standard meal allowance rule there is no requirement to keep menus and the IRS cannot deny food expenses unless they are outrageously expensive.
Providers do not need to shop at the Salvation Army store for their furniture! It’s insulting for the auditor to challenge the provider’s choice of furniture when they would not do so with other businesses. Providers are entitled to deduct “ordinary and necessary” expenses for their business, and it’s reasonable to purchase furniture used by the children and parents. If the provider purchased a $10,000 couch, then this could be challenged.
How to Defend Yourself
Here’s how to stand up for yourself – whether you are defending yourself in an IRS audit or arguing with a tax preparer:
1) If you disagree, don’t assume the auditor or tax preparer is correct. Ask the person to show you some written IRS authority that supports their position: “Where does it say it in writing?” If the person can’t show you something in writing, you are on firm ground to continue to argue.
2) Find a written authority to support your position. You can use the IRS Audits/Documents section of this website to research all written IRS rulings, court cases and other resources related to family child care taxes.
3) Ask for help. Contact me (firstname.lastname@example.org) and I can advise you how to best defend your position. Ask the auditor to talk to her supervisor. Ask your tax preparer to contact the IRS.
Everyone makes mistakes. Including IRS auditors. In this case the auditor should know better. I sent the provider some written IRS documents that supports her position and assured her that she will win her case.
Tom Copeland – www.tomcopelandblog.com