Key Takeaways
- Reconstructed time logs were rejected—the IRS reduced accepted hours by 36% due to lack of contemporaneous detail.
- Missing the aggregation election forced property-by-property material participation analysis—a much harder standard.
- Total audit assessment was $19,728 (back taxes + 20% penalty + interest) on a $14,880 deduction.
- A $1,500-$3,000 tax opinion letter would have provided reasonable cause defense against the $2,976 penalty.
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Test Your Knowledge
1.In an audit scenario involving rental property, what type of evidence carries the most weight with IRS examiners?
2.What is the most common audit outcome when a taxpayer cannot substantiate a specific deduction?
3.After an audit results in proposed adjustments, what options does the taxpayer have?