Dealing with the IRS

How to Handle Tax Problems

In spite of the fact that tax rates are lower now than in decades and that nearly 50% of the taxpayers in the US have no tax liability, plenty of people still manage to get into trouble with the IRS.

It is estimated that there is a $350 billion dollar gap between what the IRS expects to collect and what it actually collects each year.

The problems can run from the mundane - small discreprencies between income reported on a 1099 form and what is listed on the tax return. This is usually handled by mail at little or no expense to the taxpayer.

From there, things can escalate quickly.

Common problems are under-reporting of income, overstating deductions, trying to hide money overseas and outright fraud.

The actor Wesley Snipes is a prime example of the latter. He was recently sentenced to three years in prision for allegedly failing to file income taxes since 1998. Although this case is under appeal, it illustrates a favored IRS method - vigorously and publicly prosecuting public figures with the objective of putting the fear of god - aka THE IRS - into all other taxpayers.

Remember that although the IRS is generally limited on how far back it can go to collect taxes, if fraud can be proved there is no statute of limitations.

Fraud cases are relatively rare, but the IRS has an 85% conviction rate.

In spite of this lots of people like to take the gamble and see if they can get away with some blatantly illegal schemes.

Since these are generally the better to do among us, the IRS is happy to catch them whenever it can.

Dealing with the IRS

If you get into trouble with the IRS, you can represent yourself, hire an "Enrolled Agent" - usually a former IRS agent who now works on the side of the angels - have your accountant represent you or hire an tax attorney.

The more trouble you're in, the bigger the gun you should hire to protect you.

Audits

So you wrote off your new HDTV as a business expense or "forgot" to report some of your income.

The IRS audits less people than every before - something like 1%. It politically unpopular.

But the IRS has lots of tools at its disposal to detect possible errors in tax returns.

If you are audited, you can represent yourself. Try to collect or reconstruct all your records. Act in a professional and courteous manner with the auditor - these people have a lot of discretion and can choose to overlook minor problems if everything else looks good.

If you handle this correctly you should be able to reach a reasonable compromise and put the problem behind you. Do be careful about making any damaging admissions to the auditor - blame all your problems on neglect or ignorance.

If you are not happy with how you were treated, you can also ask for a review by a more senior agent. But don't try to push your luck. While these agents have the discretion to overlook problems or compromise you tax bill, they also have the discretion to refer your case up the ladder to divisions of the IRS you don't want to know about.

If you are a hothead or can't stand dealing with bureaucrats, hire a pro to represent you.

Taxpayer Advocate Service

The Taxpayer Advocate Service is an independent agency within the IRS.

Its job is to help taxpayers who've encountered tax troubles.

Individual advocates are assigned to geographic locations, with at least one such advocate located in every state.

In their own words, the Taxpayer Advocate Services' mission is "to protect individual and business taxpayer rights and to reduce taxpayer burden." They'll make sure your tax issues are dealt with in a fair and expeditious manner and help you work with the IRS to resolve disputes.

Do I Need Their Help?

If you feel that your tax return or payments were calculated unfairly or that the IRS has taken illegal or incorrect steps in dealing with your taxes, can contact the Taxpayer Advocate Service. They may be to help you resolve a wide range of tax problems.

Am I Eligible?

To qualify for its services, you have to show:

• You are experiencing economic harm or significant cost (including fees for professional representation)
• You have experienced a delay of more than 30 days to resolve your tax issue
• You have not received a response or resolution to the problem by the date that was promised by the IRS.

But They're Part of the IRS

Yes, this service is a subsidiary of the IRS, but don't let that deter you.

They operate independently and have thorough expertise of the U.S. tax system.

If you decide to apply for assistance through the Taxpayer Advocate Service, you'll be connected with a Case Advocate, who acts on your behalf, and who is your single point of contact to help you resolve your tax issues.

If you'd like to learn more or apply, just visit the service's website.

Read part two for more information on more drastic IRS enforcement techniques and some ways to deal with them.

This article does not purport to offer legal advice.