justinO419,
That is just the best idea. First thing that made me smile all day.
Thanks! Furnishedowner
Today the auditors are back again. They seem to be getting a little testy:
“This file storage box is labeled 2004 and 2005, but there are only 2005 files in it! Why is that?”
“Why did the owner sign this rental receipt on the wrong line–it looks like this is where the tenants’ name should have been written?”
MAYBE BECAUSE THE OWNER WAS WORKING 18-HOUR DAYS ALL 2005 AND WE SHOULD ALL BE GRATEFUL THERE IS A RECEIPT TO CRITICIZE.
The office staff is starting to get as irritated as me. Gross violation of our space…Where will it end? I have calculated that maybe we are 1% in error. That could only net a few hundred dollars in tax, fees, penalties. How can they justify sitting in my office and breathing the air and sucking up my air conditioning every day for free?
Furnishedowner
Have you hired an attorney yet?
Before they leave, ask them how you should handle the deduction on this year’s taxes for the cost of supporting their audit?
BLL:
I did get advice from the big-city tax attorney. He basically told me to cooperate and I should be alright. But it’s going on too long.
I asked what triggered the audit and the auditor trainee told me it was our ad in the local newspaper: “Short and long-term furnished rentals”. We often quote a daily rate as our customers compare us to the hotels and that is how they decide if they want to stay with us.
I presume they are looking to see how much CRS (gross receipts) tax we owe for any stays of 30 days or less. We did have some (summer festival when the hotels sold out and hunters in the Fall) but it is not much. We don’t LIKE daily or weekly rentals as it is too much cleaning and work.
I have told the auditors that, but they didn’t really respond. I have learned (my CPA didn’t know this) that we MUST file a CRS form monthly or quarterly in this state IF YOU HAVE 3 or MORE RENTAL HOMES.
They have copies of our Fed. taxes and I think they are trying to come up with the same numbers. I am not worried as we have always claimed all income. Furnished rentals bring in a lot more than unfurnished so there are some big numbers and we become a big target.
I had the choice of COPYING ALL FILES and bringing it to their office or letting them sit in here and go through it themselves. I would have had to hire someone full-time and rent a new copier to comply.
So I am just complaining. I will scrutinize their findings very carefully and call the attorney again if need be. Thanks for your concern.
Furnishedowner
I’ve been following your pain diligently in this thread. Please keep us updated on the progress and outcomes. Thanks.
jmd_forest
jmd_forest,
Thanks for your concern. The auditors left for some fresh meat–“We have to start another audit. But we’ll get back to you, we’re not done yet.”
So today the sky is blue, the air in the office fresh and clean. We are all humming and dancing around the filing cabinets.
Furnishedowner
I’m surprised they are wasting so many resources on you. Please keep us informed.
Maybe they’ll be like typical people and never get back around to you. You know…where someone says for 15 years, “oh I’ll get around to fixing up that old car one of these days.”
Thanks for hanging in there with me on this one, guys. It’s nice to have mental support.
The auditor called today, “We will be back on Tuesday…”
I spoke to my Realtor. She said that she was audited once for a business and that it took them 6 months to complete the audit. She ended up owing $255 for a rule that didn’t exist when she started the business.
So that made me feel a lot better. I just happen to live in a thorough state!
I was worried that they might be like the Federal IRS auditors–they drop it if they don’t see enough money to justify their time spent. This is going to be very thorough. I peeked over a shoulder while strolling casually by and saw a TIMELINE for a unit, going back to the very beginning. I expect more questions: “Why was this unit vacant for 10 days between tenants in May 2005, while this other unit was only vacant for 3? Can you explain this discrepancy?”
Furnishedowner
Question: What is the difference between an overzealous IRS agent and a Rottweiler?
Answer: The Rottweiler will let go, eventually.
Dave T,
I liked the joke.
The auditors are back today. So I spent the entire day moving furniture into my new duplex. This took a bunch of us and 2 pickup trucks. We move it in, decide we don’t like it, put it next door, and then back to storage. It takes a lot of time to make a bunch of used furniture look good when mixed together. We got it done and had fun.
So I escaped the auditors. 'They are very quiet, like drones, just putting numbers into their computers. I asked one of the girls to give them a soda or a cup of coffee.
I just can’t feel friendly. I couldn’t even offer them coffee myself. That is not logical, but it would feel to me that I am offering to coil the rope for the hangman.
Furnishedowner
Finally had a long chat with the chief auditor sitting there in my office. He said that yes, they had found some short term rentals mixed in with long term in the files. Just like I told them on the first day.
I explained that we get a lot of pressure from the mayor’s office and summer festival office to house media people when the hotels fill up. We don’t want to do it, and we probably lose money on it, but we did end up housing a German magazine reporter, a state PR firm, and a radio talk show host all for about a week this year. The hotels were sold out.
So they are carrying on with completing the audit. IT WILL TAKE 6 to 9 MONTHS TO COMPLETE. Then they will READ ME MY TAXPAYER RIGHTS, and schedule a final exit interview in their offices with their supervisor. I will have the right to explain any discrepancies. They might send a list of questions before then. He did admit that it seemed I was claiming all income, as I also stated the first day.
What I have learned from this is that I should have asked a bunch of questions when they started. Like “How long does a typical audit last?” Actually, I think I did ask that and the reply was, “It varies.”
Maybe the only thing I did wrong was try to help my city out without appreciating the consequences of renting short term. I could be dead or retired or in the mist of Alzheimer’s in 6 months. I am not gonna worry about it any more.
Furnishedowner
Today was the day of the State Tax Audit Exit Interview. Where I was read my rights: You have the right to an appeal. You have the right to an extension. You have the right to run screaming from the room…
The two auditors and their supervisor, the Boss Auditor, came to my office. After the obligatory chit-chat about the weather, and moving around all the chairs, they got down to business.
Yes, just as I told them, we had fallen into the category of short-term rentals about 2% of gross revenue (my estimate was 1%). So we owe state sales tax (CRS gross revenue tax) on about $42,000+ of rental income. We did do it. We didn’t want to do it, but yes we had rented for less than 30 days to those tenants. There was a timeline on each tenant back to 2004, very interesting, re-visiting those old names. Okay, we will pay that. An education can be expensive.
They are also trying to nail us on “Reimbursed Expenditures”. Say our handyman bought a door at Home Depot for $200 (Home Depot paid gross receipts tax on it) and then installed it-- $200 labor cost. Then we subtracted $400 from the lease payment due one of our lessors. Now we need to pay 7% State sales tax on that $400! If I understood it correctly.
That tax on tax was mind-boggling, but, hey, it’s the law! They want us to pay tax on any credit card reimbursements as well. The bookkeeper and I kept saying, “But our CPA and the attorneys never advised us of this. We had 4 business attorneys and our CPA set this up. Even our CPA didn’t know about mandatory CRS filing for more than 3 rentals!”
The good news, they said, was that we had claimed TOO MUCH INCOME on our Federal Taxes. How could that be good news?
The head state tax office will corroborate or amend their findings and send us a letter within 90 days. Then we can appeal it in the state capitol.
I am going to go talk to the big tax attorney. I’m gonna need a hired gun.
Furnishedowner
I met with the hired gun tax attorney lawyer. Nice guy. Gets $250/hour and I hope he will be worth it.
He will do battle with the state tax attorney when we have to appeal their rulings. I am learning terms I never wanted to learn such as “compensated expenditures”.
Now it’s up to the state tax authorities to notify us of their decision regarding the local auditors findings. In any case there is going to be a huge hole in this year’s profits. For a few moments the idea of a salaried job sounded good. But I will just keep slogging on.
Furnishedowner
Sorry to hear this. It sounds like you normally have such a good profit margin on your rentals. From your previous post where you explained the CRS gross revenue tax, it didn’t seem like you would be out too much money. Hope you’re able to pull through this.
Thanks Justin0419.
Yep, before I thought they would just want tax on the rentals that fell below the 30 day mark. They even dinged me for renting out FEBRUARY on a monthly basis since it is only a 28-day month. So just remember that Feb. is a semi-month.
But I didn’t know about the blood on their teeth for “compensated expenditures”- (bills deducted for owners of our leased properties) nor did I think they would interpret part of my business as a service industry and subject to gross receipts tax.
So I have no choice but to fight this. What I don’t pay in tax I will spend for the attorney. When it’s all over I will know more about this business I created. The initial lawyers and CPA missed a bunch of stuff I should have been warned about.
Yes, renting furnished can be high profit. It now appears it can be high risk for an audit as well. It has been nice venting to someone about my personal little misery of the month.
Funrishedowner
Would you please explain the context for “compensated expenditures?” Are you saying that you don’t own some of your rentals, that you are acting as a property manager for some of these units?
If so, then I can see how you are providing a service.
Dave T,
We lease some furnished homes from their owners with the contractual right to sub-lease them. We pay those owners a percentage of the rents received, or fixed rent depending on the circumstances. We deduct expenses from their portion of the rent. A portion of those expenses have now become “compensated expenditures” per the state tax people.
This came about because people approached us to rent out their property. Of course we couldn’t do that, not being a property management firm.
My attorney checked with the state real estate authorities and it was decided that we could lease those properties. The CPA and attorney met with their in-house business attorneys and we grew from that meeting.
If it is now disallowed we will have to re-write those lease conditions.
Furnishedowner
OK, I think I may see what happened.
This is only a guess.
You are in a sandwich lease. When the property is leased, the owner pays repair costs. You made repairs and “charged” them back to the owner as a deduction from the rent that was due that month.
Now, I am guessing that you also entered the repair cost as an expense on your books so you could pay your repair contractors. This repair expense was offset (or should have been offset, or compensated) by a charge to the owner’s rental distribution. Hence, a “compensated expense”.
Have I got it ?