I was notified by the Oregon IRS that they are requiring me to prove all my itemized deductions for 2023 or pay around $5000 in adjusted tax with another $1000 “substantial understatement” penalty.
With the cost of a CPA and the time/energy required to collect receipts and submit them through antiquated means, I’m wondering if it might be easier to just pay it. If I do, can I request a discount or a waiver of the penalty if I pay it all at once? Will this affect next year’s returns where, if I itemize my deductions again, I’ll be audited? Am I admitting to wrongdoing if I opt to pay instead of dealing with the hassle? Will this get me audited by the federal government if I pay it?
Oregon will audit other years if you don’t provide substantiation for the deductions. There should be a phone number and email address for your auditor on the letter. Get a hold of them and ask for an extension. Once Oregon is done with their part of the audit, they will send the adjustments to the IRS, and you will have to submit an amended federal return with the unsubstantiated deductions removed, causing more tax due than the $5k Oregon is asking for. I’m an Oregon-licensed tax consultant and enrolled agent. Oregon doesn’t play.
What kind of itemized deductions are they? Even if it’s just the big ones you can substantiate, it might be better than just accepting it. Was any of it falsified?
Flynt said:
What kind of itemized deductions are they? Even if it’s just the big ones you can substantiate, it might be better than just accepting it. Was any of it falsified?
Supplies, deductible meals, and utilities. It’s for my writer profession (Schedule C), so things like internet, office supplies, meals with my editor, and research materials. I have the receipts if necessary, but I’ve always just ballparked the figures (significantly underestimating costs, to be honest), so I would have to manually go through credit card receipts by line item, which would take several days I don’t want to spend.
Plus, there are about 5 forms they’ve listed to fill out, and I have to appeal within two days because they send all this by snail mail and only give you a week to respond, so I would need a CPA just to figure that all out.
@Rex
Wait, is this about itemized deductions or business deductions? Two different things. Did you put business expenses under itemized personal deductions?
Flynt said: @Rex
Wait, is this about itemized deductions or business deductions? Two different things. Did you put business expenses under itemized personal deductions?
I put them all under Schedule C, not on my main income deductibles list. It says ‘Oregon Personal Income Tax’ where I have my Schedule C as a second job. It says that I must ‘prove that the expenses were in fact paid or incurred and are directly connected with the taxpayer’s trade or business.’ I can prove that, but is it worth the time, energy, and money? Will I end up spending more on a CPA and my personal time than if I just paid it to begin with? Or is this a snowball growing into an avalanche, and now I’ve got to worry about federal and 2024 taxes?
@Rex
Okay, good. So, this is like $50k of expenses, right? You really should respond with at least some proof of some of the expenses. If the IRS also disallows these expenses, that could be another $15k in taxes. It seems worth it to at least spend 10-15 hours working on this, right? Was the Schedule C at a loss with the deductions, or was it profitable? Are you at risk of them saying this is a hobby?
@Flynt
No, it’s only $5,000 worth of expenses I claimed, which is why I’m so confused. No, Schedule C is not yet profitable. I’m writing books and plan to get published next year but nothing published yet. I have other writings I’ve published not-for-profit as well. (Not a hobby.)
@Rex
Are they saying you owe $6k in taxes and penalties for removing $5k of expenses? That does seem really odd. Was this your first year deducting expenses?
Flynt said: @Rex
Are they saying you owe $6k in taxes and penalties for removing $5k of expenses? That does seem really odd. Was this your first year deducting expenses?
No, I’ve been doing this the last 6 years or so. There’s this section that says ‘charitable cash contributions per return adjustment: $33,150,’ but I have no idea where they got that number from because I only reported $4,000.
@Rex
All of this is VERY confusing. You’re mixing things up — charitable contributions are itemized deductions, not business expenses. What exactly ARE you talking about? Sounds like there was more than one issue with your tax return.
@Fox
Yes, there were two issues, one with Schedule C and one with Schedule A. I write off about $5,000 on Schedule C since my business does not (yet) operate at a profit. The Schedule A is even weirder because (I think?) it says I claimed $33k in charitable cash contributions, but I am literally staring at my return and I only claimed $4k.
@Rex
Did you self-file or use a tax person? That charitable deduction sounds like Schedule A, could you have made a typo? On your 1040 tax return for the year in question, what is the amount on line 12? Are you sure these 6 years of expenses are not startup costs, which are not yet deductible until you are published?
Maddox said:
Schedule C is not itemized deduction, so something is off with your facts.
This is where I’m confused. So, along with my main income tax, I also file a Schedule C for my side business as a writer. I write off about $5,000 since my business does not (yet) operate at a profit. It is this and a Schedule A that are listed on the letter as having been adjusted. The Schedule A is even weirder because (I think?) it says I claimed $33k in charitable cash contributions, but I am literally staring at my return and I only claimed $4k.
Maddox said: @Rex
See if you can block personal info and post the letter.
I don’t know how to post an image. Here’s the Schedule A text:
SCHEDULE OR-A - TOTAL GIFTS TO CHARITY: A taxpayer is required to provide records to verify their deductions during an audit, such as receipts, canceled checks, financial account statements, and other documentary evidence. We disallowed your charitable contributions deductions because you did not provide the requested documentation. (IRC 62, 63, 170, 6001 and 7491; ORS 314.425, 316.048; Treasury Regulation 1.170A-13)
Charitable Cash Contributions Per Return: $33,150 Charitable Cash Contributions Per Audit: $0 Adjustment: $33,150
Charitable Non-Cash Contributions Per Return: $456 Charitable Non-Cash Contributions Per Audit: $0 Adjustment: $456
Total Charitable Contributions Per Return: $33,606 Total Charitable Contributions Per Audit: $0 Adjustment: $33,606
SUBSTANTIAL UNDERSTATEMENT PENALTY: We have determined that you have a substantial understatement of tax for this tax year. A substantial understatement of tax exists for any tax year if the amount of the understatement for the tax year exceeds $2,650. A penalty of 20% of the amount of tax due to the substantial understatement (SUP) has been included in the balance due. (ORS 314.402; OAR 150-314-0205) Underpayment of tax $4,373 Times x 20% Penalty $875.