With Washington searching for ways to cut the budget deficit, IRS officials face intense pressure to collect more revenue. The agency plans more audits, especially of taxpayers in high brackets or those who are self-employed and deal in large amounts of cash. The IRS also has turned up the heat in such areas as offshore tax evasion, including undisclosed foreign bank accounts.
If you become an IRS target, what should you do? For many people, the answer may seem simple: Surrender as quickly as possible, no matter how good a case you have.
Even if you are sure you are right and have all the records to prove it, fighting the IRS, one of the most powerful government bureaucracies on the planet, can be the ultimate nightmare. Seemingly routine struggles can drag on for years, leading to endless frustration and sleepless nights. Even those who eventually triumph may wonder if the fight was worth all the time, effort and expense.
But if you're ready for the challenge, there are many smart ways to fight back—and win. Start by keeping comprehensive, well-organized documents. Always scour the IRS's claims for mistakes. Don't get discouraged when dealing with tax officials. If you are convinced you are correct, consider pushing your case up the chain of command. Try the IRS appeals division. You may also get valuable help from the IRS's taxpayer advocate service. Or go to court.
At the same time, there are some classically dumb mistakes to avoid—everything from simply ignoring the IRS to arguing that it somehow is voluntary to pay federal income tax.
Here are some combat tips from lawyers, accountants and "enrolled agents," who are federally licensed tax experts authorized to represent taxpayers at all levels of the IRS.
Dumb moves
Hire the wrong tax preparer: Beware of someone who asks you to sign a blank tax return. Or whose fee is based on a percentage of how much you save in taxes. Or who promises to get you a significantly higher refund than anyone else can. People like these are likely to prepare outrageous returns that will land you in deep trouble with the IRS.
The Ostrich approach: One of the biggest mistakes is to bury your head in the sand and ignore IRS notices and letters, hoping the tax collectors eventually will lose interest and go away. "When dealing with the IRS, the best thing someone can do is to maintain regular communication," says Charles P. Rettig, a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez P.C., in Beverly Hills, Calif. "Whether during an audit or in the tax-collection process, ignoring the IRS is simply a bad idea."
Act professionally throughout the process and reply to IRS correspondence on time. The IRS is very serious about deadlines. Also, "keep a record of all communications and correspondence with the IRS, including proof of delivery, and keep your records organized," says Caroline D. Ciraolo, a tax lawyer at Rosenberg Martin Greenberg LLP in Baltimore.
Frivolity: Some people tell the IRS and judges that it somehow is voluntary to file a federal income-tax return and pay taxes. Or that their wages, tips and other income for personal services aren't taxable. Or that they are residents of a state but not of the United States. Or variations of these themes.
Don't even think of making any of those claims. Tax Court judges routinely label these as "frivolous" arguments, delaying tactics or both. More important, judges often impose stiff monetary penalties on those foolish enough to persist.
Bribery: This is even dumber—and far more dangerous—than frivolity. In a case last year, for instance, a Houston-area resident was sentenced to prison for two years for trying to bribe an IRS agent, according to a report by the Treasury Inspector General for Tax Administration. The U.S. Attorney's office in the southern district of Texas said the man offered the agent $2,500 to reduce his tax liability to around $500 from $49,000. In addition, the man "repeatedly offered the agent pizza from his restaurant as part of the deal."
Automatic surrender: Just because the IRS says you owe money doesn't mean that's correct. The agency makes mistakes—plenty of them, even in computing penalties and interest. "I have had several clients receive notices regarding unreported securities sales," says Stephen W. DeFilippis, the owner of West Suburban Income Tax Service in Wheaton, Ill., and an enrolled agent. "In these cases, the clients exchanged mutual funds one for another and didn't realize that's a taxable event." The IRS, he says, sent a notice "including the gross proceeds in income and assessing tax on the additional income."
But the IRS missed a vital point, he says: "The clients brought me these notices, and in each case the mutual-fund exchanges resulted in a loss. So instead of owing a large sum to the IRS, the clients got a refund."
This story shows how foolish it can be to pay what the IRS says you owe without "thoroughly investigating" the subject, says Mr. DeFilippis.
But if the amount in question is relatively small and the issue is confusing, some may conclude it isn't worth the time, trouble and expense of challenging the IRS and may decide to pay in order to make the problem disappear. It depends on the details of each case, including how confident you are of victory and how much time and expense you are willing to devote to the battle.
But often the smartest move is to get someone involved on your side: either an accountant or a tax attorney. The IRS makes mistakes. Loads of them. But the presentation and proof of those mistakes can be critical. And even when the IRS is proving obstinate, having that expert on your side can give you enough gumption to fight on. The IRS is no longer the automatic winner in appeals. As it used to be. And an appeal may be your only avenue of relief.
Consult your planning or tax professional if you have questions.
No comments:
Post a Comment