Earning too little can get you an IRS audit

If there is one thing about being poor that you can be pretty sure of is that you aren’t likely going to find yourself being audited by the IRS, or so you would think. Apparently though this train of thought could be wrong if what happened to single mom Rachel Porcaro is nay indication.

This train wreck of ridiculousness started a year ago when Rachel Porcaro, a 32-year-old single mother with two boys, was told to appear at the Seattle office of the IRS as she had been flagged for an audit. An audit on a income from her $10.00 an hour job cutting hair at Supercuts for a total yearly income of $18,992.00. Out of that she also paid a couple of hundred dollars to H&R Block for them to prepare her taxes so there would be no problems.

Well it turns out there was a problem. In the eyes of the IRS Porcaro earned too little money to survive in Seattle so therefor she must be lying on her tax return.

“I asked the IRS lady straight upfront — ‘I don’t have anything, why are you auditing me?’ ” Porcaro recalled. “I said, ‘Why me, when I don’t own a home, a business, a car?’ ”

The answer stunned both Porcaro and the private tax specialist her dad had gotten to help her.

“They showed us a spreadsheet of incomes in the Seattle area,” says Dante Driver, an accountant at Seattle’s G.A. Michael and Co. “The auditor said, ‘You made eighteen thousand, and our data show a family of three needs at least thirty-six thousand to get by in Seattle.”

“They thought she must have unreported income. That she was hiding something. Basically they were auditing her for not making enough money.”

Source: Seattle Times

Now if you think that the matter was settled quickly and everyone went their own ways with the matter all straightened out – well think again. It actually gets worse

She had a yearlong odyssey into the maw of the IRS. After being told she couldn’t survive in Seattle on so little, she was notified her returns for both 2006 and 2007 had been found “deficient.” She owed the government more than $16,000 — almost an entire year’s pay.

She couldn’t pay it. Her dad, Rob, has run a local painting business, Porcaro Power Painting, for 30 years. He asked his accountant, Driver, for help.

Rachel’s returns weren’t all that complicated. At issue, though, was that she and her two sons, ages 10 and 8, were all living at her parents’ house in Rainier Beach (she pays $400 a month rent). So the IRS concluded she wasn’t providing for her children and therefore couldn’t claim them as dependents.

She stood to lose what is called earned income tax credit, a refund targeted to help low-income workers. You qualify only if you’re working, as Rachel has been.

Driver quickly determined the IRS was wrong in how it was interpreting the tax laws. He sent in the necessary code citations and hoped that would be the end of it.

Instead, the IRS responded by launching an audit of Rachel’s parents.

Source: Seattle Times

After incurring almost $10,000.00 in accountant bills to prove to the IRS that they hadn’t broken any tax laws Porcaro’s parents were let off the hook. Rachel on the other hand had to pay back $1,438 – the amount claimed by her two boys as dependents – including penalties and interest. As well she was told that since she doesn’t have enough receipts to prove that she was supporting her children she could no longer claim them as dependents.