Hi everyone, I’m dealing with a 2023 audit from the IRS and need advice. They’re asking for proof of educational credits and clarification on my Schedule C. I had rental income in 2023, which was reported on Schedule C instead of filing a 1065. In 2024, I filed a 1065 for 2023, but I didn’t amend my tax return.
I spoke to two CPAs:
One said to amend the 1040, remove Schedule C, and include the K-1. Then send the audit department the educational credit docs and a letter explaining the changes.
The other said not to amend, just send receipts to back up the repairs/expenses on Schedule C and the educational credit documents.
I’d recommend amending. A 1065 is for partnerships, but most rentals should be on Schedule E unless you’re running it like a business (e.g., providing services like cleaning, meals, etc.). If there’s a K-1 involved, you’d need to amend to include it. Is this rental a partnership? If so, who’s the other partner?
If it’s a partnership, I’d suggest amending the return to remove Schedule C and include two K-1s. But I’m curious—why set it up as a partnership with your wife?
@Harley
I’m worried that if I amend 2023, the IRS might ask me to amend the past five years. I’ve lost receipts for those years, so I can’t prove all the repairs.
Ren said: @Harley
I’m worried that if I amend 2023, the IRS might ask me to amend the past five years. I’ve lost receipts for those years, so I can’t prove all the repairs.
Amending might not change your taxes much—maybe just reduce self-employment taxes if it’s reported correctly. Still, I’d advise fixing it now. Find a preparer soon since it’ll get harder to get help during tax season. And in the future, always keep proof of expenses until at least five years after you sell a property.
@Harley
Thanks for the advice. My preparer says to send the receipts as-is for Schedule C and avoid amending for now to keep things simple. We sold the property this year, and that’s when we realized this mistake because the state asked for the 1065. Honestly, I’m just stuck on what to do.
Harley said: @Ren
It’s tricky. You can send what they’re asking for now, but if the IRS realizes there’s a 1065, they might come back looking for the K-1 later.
Thanks again. One more question—my receipts are for kitchen cabinets, a new boiler, and new flooring, totaling $15k. I reported it all in 2023. Should that have been depreciated?
Harley said: @Ren
Yes, those should be depreciated. Your accountant needs the date, amount, and a description for each item.
My accountant said it’s fine to report the full $15k as repairs since they depreciated the property. I know that doesn’t sound right, but will the IRS reject those receipts?
@Ren
The IRS might question it. Major items like cabinets and boilers are considered improvements, so they’d typically be depreciated over time rather than expensed fully in one year. Be prepared for follow-up questions.
Harley said: @Ren
It’s tricky. You can send what they’re asking for now, but if the IRS realizes there’s a 1065, they might come back looking for the K-1 later.
Why was a 1065 filed instead of treating it as a qualified joint venture? It wouldn’t save on self-employment taxes.
Ren said: @Harley
It’s a rental property under an LLC. No idea why it was done this way—probably the accountant’s advice.
LLCs are more about legal protection than tax structure. A single-member LLC is taxed like it’s owned directly by you unless you elect S-Corp status, which adds a lot of complexity. Most rentals just stick to Schedule E.