Myths in Dealing with the IRS
Myth 1: The IRS Could Put Me in Jail Because I Own Them Money
You can’t go to jail because you owe the IRS a million dollars. They can lien your property and garnish your wages, but you don’t go to jail because you owe money to the IRS.
However, you can go to jail for fraud. Not filing a tax return can constitute an intent to defraud the IRS. So the moral of the story is always file a tax return, even though it may be an estimated tax return.
What is an estimated tax return? It is a tax return where you estimate the figures—yes, you can guess your way through a tax return. But you need to state in writing that the return is an estimated tax return and when you receive accurate information you will file an amended tax return to correct the original return.
Myth 2: An IRS Audit Costs Thousands of Dollars
An office audit with the IRS, assuming the CPA is representing the tax client and he has all the proper documentation, usually takes about 1 to 3 hours. The cost is a few hundred dollars, not thousands.
If the client’s documentation is poor, then is could take many more hours of professional time to complete the audit. And that could cost thousands. So, clients are to beware--the cost of an IRS audit is predicated on the completeness of their documentation.
However, if you want to sue the IRS in tax court or District Court, then it can costs thousands of dollars. The attorneys love to do this. My philosophy is to work with the IRS at the lowest level first, before we march up the ladder. Each step gets more expensive. However, it is cheaper for the client to start first at the lowest level.
Myth 3: I Should Attend The IRS Audit With My Representative
In most cases, I don’t allow my client to accompany me to the audit. It is not necessary and besides my client usually has a tendency to say things he should not say, or get so upset that his presence is an emotion detriment to the audit. So, I get a power of attorney and represent the client at the audit.
If I don’t know the answer to an IRS questions about the client’s documentation, then I state to the IRS that I will get the answer from the client at a latter day. This buys me some time to get the appropriate documentation needed in the audit.
There are times when I want the client at the audit because of taxpayer’s creditability that is needed in the eyes of the auditor. There is a tendency of an IRS auditor to belief the client is being dishonest in his tax matters because of certain types of transactions. If I want that feeling to be disproved, sometimes I need the client’s presence to directly answer questions. We have nothing to hide is the best motto to disprove dishonesty.
Myth 4: I Need to Bring All My Boxes of Checks and Deposits To The Audit
There is much confusion dealing with what is required in documentation for an IRS audit. Hopefully, let me give some clarity to the subject.
Usually, the IRS letter concerning the audit will ask you to bring everything you ever did in company transactions to the audit. I did that once in an audit, and the auditor complained that he didn’t have the time to go through the client’s boxes. Now, I only bring critical documentation that the IRS usually is asking for concerning specific types of income or expenses.
My first meeting with the IRS agent usually will define what is adequate and what is lacking in the documentation. The second meeting hopefully completes the documentation, assuming the client has the documentation in the first place. If not, the client will need to bridge that documentation gap by getting third party verification of the expenses and revenues that have occurred.
Even before an audit occurs, it is my belief that a CPA firm should document all critical client information pertaining to a tax return at the time of return preparation. In this manner, the documentation is more timely and current than waiting 2 to 3 years for the IRS to sent the audit letter. Who can remember anything 2 to 3 years from now?
Myth 5: What the IRS Agent Says Is Fact
Every IRS agent, not unlike a CPA, has his/her own opinions of the Tax Code and its interpretations. It may not be factual. You would think that all IRS agents should know the complete tax code and the accounting that is to accompany it. I find that this is usually not the case because of the complexity of the Tax Code and the understanding required in generally accepted accounting principles. That’s why there are appeal processes at the IRS and tax courts.
If I disagree with the office auditor, and we can’t come to some level of reasonable compromise, then I will ask for the Supervisor. Now, usually the Supervisor will side with his or her agent because they have to live together in a work environment. My next step is to the IRS Appeals level if I feel my position is justifiable.
The cost of taking my client to the Appeals level in the IRS is usually very inexpensive because it only takes 1-3 hours to prepare and 1-3 hours to present. In contrast, going to an appeal level in a court of law will cost thousands of dollars.
If you want to go any higher with your tax issues, then the tax court is the next level. And that is expensive. Fortunately, I have never had to go that far with an IRS audit.
Myth 6: I Will Not Take That Deduction Because It May Trigger An Audit
IRS audits are few and far between. Less than 2% of all tax returns in the United States are audited. And with my CPA practice that figure is less than .5%--that’s a small figure.
If you are truthful and documented in your tax return, you have nothing to fear with an audit. Even if you don’t have the documentation, but you did make the expense, my advice is to take the deduction. These are many third party verifications that could be used to support the expense.
Computerized tax returns, electronic filing of tax returns, competent tax preparers who know how the tax schedules are to be used, and the signing of the tax return as a CPA, all help in not getting audited in the first place.