Buy the Audit protection (story)

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loghound
Posts: 43
Joined: Thu May 09, 2019 7:01 pm

Buy the Audit protection (story)

Post by loghound »

tl;dr I used the audit protection in Turbotax and it ended up saving me $60,000 with almost no work on my part.

As it's tax season and I was working on my taxes yesterday I thought I would 'pay back' the boglehead community with a story and a strong recommendation to buy the audit protection . While I'll specifically talk about turbotax because that is what I use, I suspect it would apply to any of the big providers (I'm guessing they all offer a similar service)

I'll try to keep this short but there are some interesting parts so we'll see how it goes....

I've used TurboTax since I graduated from college ('87) but about 12 years ago my taxes became complicated. I was running my own side business while still a W2 employee at MEGACORP while doing contract work at night with a third smaller company (I was busy...). I had a growing investment portfolio and that year I had some tricky stock compensation. I also thought I was 'adult' enough to hire a CPA to do my taxes as that is what 'Adults' did.

For two years I used them and while they were expensive (I want to say it was almost more than $700 to have taxes prepared) but the people were pleasant, the process was pretty painless and I felt good about it because 'I had a CPA and they would protect me'. It was the 2nd year as I was picking up the taxes that I casually mentioned "Hey, if I get a note from the IRS or get audited I just call you, right?", the answer stunned me but was basically "no, you are on your own" (they used much nicer words but that was what it boiled down to)

So the year after I went back to TurboTax. I figured if the local CPA wasn't going to provide any service other than tax preparation then I should just own it anyway. That first year back was pretty smooth but there was one part that just about killed me. I had some incentive stock where you had to calculate 4 prices and 3 dates to figure out the tax obligation for every grant. There was also a question of 'if this income was in your W2' which as far as I can tell was not true. I ended up owing about $60k that year in taxes which wasn't that unusual given all of the various hustles I was running and the large amount of stock I had disposed of (I was pretty unhappy about it but I went over my taxes numerous times and that was how it worked out)

As I filed, on a whim, I checked the 'audit protection' button for an extra $40 or so (I think it's $50 now). I knew my situation was expensive and thought 'well, if something happens it may be worth having this'. I didn't hold out much hope it would actually help very much but I figured 'what the heck, it's $40 on a $60k tax bill"

about 5 months later I got a letter from the IRS, it wasn't an audit, it was a demand that I had misstated that above stock purchase and I owed them another $20k and I had two weeks to either pay or challenge it. This was my first time having something like this happen and I was pretty stressed but I went back to my files and pulled out the audit protection info. In it they said that if contacted by the IRS you couldn't directly respond (a direct response by me would void the agreement) and to contact them right away at a 1-800 number.

On first contact I wasn't very impressed, a guy clearly reading off a script took some basic info, asked me to send in a scan of the IRS Letter, and said they would get back to me. I was pretty concerned they weren't up for the task and started thinking about my options (hire a CPA? maybe just pay the money? maybe contact them myself?)

A few days later the most wonderful women called me, she seemed super competent and had me recount the story, asked for a bunch of documents, and said "don't do anything, I've got this... I'll contact the IRS and start the challenge" --that was an immediate relief as the demand letter was a bit scary.

Over the next 2-4 weeks we talked maybe 3 times as she tried to sort out what happened, what I had done, and what the IRS was claiming. Every time she called she was prepared with good questions or specific requests for additional documents.

within a month she called me and said "Ok, I've figured it out. You don't owe them money, they owe you money". Part of it was easy enough, I hadn't listed cost basis at one point (Turbotax was really tough to use on those kinds of stock incentives at that time.. They have gotten MUCH better since then). and that was an easy fix that erased the money I owed them.

Where it got really interesting is when she said "you did the stock wrong, you overpaid" and she volunteered to refile my taxes with the fix. I'll never forget being on the phone with her as we argued about this. I was so certain I had it right and had properly calculated my payment and was literally pulling up IRS instructions and reading them to her to prove my point and she kept on saying "no, that's not how it works". Finally, exhausted, I said "ok, if you can convince the IRS you are right then this thing gets closed and we never have to talk about it, I mean they won't revisit this later will they" and she said "well, nothing is impossible but closed cases are almost never reopened".

Let's be clear... I was convinced the IRS would agree with me on my interpretation but figured I wasn't going to convince her but the IRS could. I'll never forget the voice mail I got about a week later saying "The IRS agrees, you overpaid, they are going to process a refund of $40k"

So instead of owing another $20k, I got a $40k refund, not bad for a $40 investment.

Since then I've always purchased audit protection, two more times in the last ten years I've gotten letters from the IRS (not nearly as dramatic as the first time it happened), and both times I've simply called the number, answered a few questions and the problem just goes away.
miket29
Posts: 227
Joined: Tue Jun 20, 2017 9:07 pm

Re: Buy the Audit protection (story)

Post by miket29 »

I always buy the protection too. That said, experience with Audit Defense can vary.

(edited to correct details of story)
Several years ago I got an letter from the IRS that said I owed more tax due to ESPP sale. So I called and they took over the case; I sent the agent they assigned my tax return and scans of the documents reporting the sales.

I always print out the complete return including all the worksheets and so I could see that I had filled everything out correctly. Before talking to him I reviewed my return. It turns out there was a TurboTax bug. I sold the ESPP shares in a qualifying disposition for more than the 15% discount purchase price but below the market price on the purchase date. Therefore the difference between the actual purchase price and the final sale price was ordinary income, and the capital gains were zero. With the bug, TurboTax did not list the sale on Schedule D since (I'm guessing) it had zero capital gains. Our friends at the IRS get reports from brokers of all sales and were miffed the sale was not reported so they felt I was hiding income.

I explained all this in the cover letter to Audit Defense when I faxed over all the docs (this was back before email was big), but apparently he didn't read it. So I have a call with the Audit Defense agent and he starts by saying "Looks like the IRS is right, you owe them X". I then had to walk him thru the stock documents and the worksheet to show him the tax return schedule was wrong due to a bug. He says "Oh, you're right". And then he handled whatever needed to be done with the IRS.

In the end it was still worth it because they dealt with the IRS, not me. Maybe mine was seen as a simple issue and so they assigned it to someone with less experience than the person the OP got. But I wasn't that impressed with the quality of their representative.
Last edited by miket29 on Wed Apr 07, 2021 3:58 pm, edited 6 times in total.
RudyS
Posts: 2170
Joined: Tue Oct 27, 2015 10:11 am

Re: Buy the Audit protection (story)

Post by RudyS »

Thanks for sharing this experience. I have "always" used TurboTax, and never till last year even considered the audit protection. But last year we changed states, and moved to a CCRC where part of the fee is deductible as prepaid medical expense. Although I three times in the past I have successfully dealt with CP2000's on my own, I decided to spring for the $40 this time. In another couple of years I'll know if I wasted my money. But for my current return, I'm back to not paying for it.
j9j
Posts: 96
Joined: Sat Oct 24, 2015 1:46 pm

Re: Buy the Audit protection (story)

Post by j9j »

Good experience. I never even considered that audit protection fee but now I will keep it in mind if my situation gets more complex. Thanks
Topic Author
loghound
Posts: 43
Joined: Thu May 09, 2019 7:01 pm

Re: Buy the Audit protection (story)

Post by loghound »

miket29 wrote: Wed Apr 07, 2021 2:03 pm
I always print out the complete return including all the worksheets and so I could see that I had filled everything out correctly. Before talking to him I reviewed my return. It turns out there was a TurboTax bug. I sold the ESPP shares in a qualifying disposition for more than the 15% discount purchase price but below the market price on the purchase date. Therefore the difference between the actual purchase price and the final sale price was ordinary income, and the capital gains were zero. With the bug, TurboTax did not list the sale on Schedule D since (I'm guessing) it had zero capital gains. Our friends at the IRS get reports from brokers of all sales and were miffed the sale was not reported so they felt I was hiding income.
My experience in the original story was with ESPP and RSU sales. Especially with ESPP's you end up with a confusing set of price you paid, fair market price, price you sold at, etc. which makes me always dread dealing with them.

I'm sorry your experience wasn't as good as mine, but as you say you still get to avoid talking with the IRS which is a win. My other two uses were super-easy clarifications that were promptly resolved.

I've long wondered if my first experience was unusual or not, perhaps it's a bit unusual because of how spectacular the person I got was (and she basically re-did my taxes) but regardless it's still a pretty good use of $40
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