There is a general misconception about what the IRS can and cannot do. Owing money to the IRS is not like owing any other creditor. The IRS is one of only a few creditors who can seize and sell your home even though state law may prohibit other creditors from doing the same.
Dealing with the IRS can be confusing, time-consuming and risky for someone who is not familiar with IRS procedures. Most taxpayers are not very successful in handling their own affairs with the IRS. The primary reason is the procedures of the IRS are extremely complicated, and most taxpayers do not understand how to protect themselves. In addition, some taxpayers become too emotionally involved which reduces their effectiveness in dealing with the IRS. However, no taxpayer should be afraid to CHALLENGE THE IRS. Although most taxpayers have a great fear of the IRS, they know little about how it works and the IRS benefits from this ignorance.
The fact is the IRS wants you to fear its power so you will comply with the law and file correct tax returns. A former Commissioner of Internal Revenue has stated that the only way the IRS can keep the taxpayers honest and paying their taxes is to keep them afraid. If you mishandle an IRS audit, you could be required to pay additional taxes. If you owe taxes and do not know your rights, the IRS may seize and sell your property to pay the taxes. Being represented by someone who understands the inner workings of the IRS and how to deal with the IRS can greatly increase your chance of solving your problems with the IRS.
Courtesy and Consideration
You are always entitled to courteous and considerate treatment from IRS employees. If you ever feel that you are not being treated with fairness, courtesy, and consideration by an IRS employee, you should tell the employee’s supervisor.
You have the right to plan your business and personal finances in such a way that you will pay the least tax that is due under the law. In audit and collection matters, the IRS is not always correct and frequently makes mistakes which increases the amount of tax you may owe. Taxpayers have certain rights in dealing with the IRS. You should never be afraid to exercise your rights when dealing with the IRS. The IRS is required to apply the law consistently and fairly to all taxpayers.
Organization of the IRS
The IRS is one of several components of the United States Department of Treasury. The top official of the IRS is the Commissioner of Internal Revenue. The IRS is divided into a national office and various divisions. Within the IRS, there are three IRS employees that the average taxpayer is likely to encounter. They are the Revenue Agent, the Revenue Officer and the Special Agent. If you are lucky, you will never meet the latter two.
The Revenue Agent
The Revenue Agent is responsible for enforcing the civil tax laws through the examination of tax returns. The Revenue Agent determines whether a taxpayer has correctly reported all his income and deductions. The Revenue Agent has the power, subject to review within the IRS, to adjust your income and deductions, which may result in you owing additional taxes, penalties and interest. The Revenue Agent will determine one of three things with respect to your tax return: 1) that the return is correct; 2) that you paid the IRS too much in taxes and are entitled to a refund or 3) that you did not pay enough in taxes and owe additional money to the IRS.
The Revenue Officer
The Revenue Officer is responsible for the collection of delinquent taxes and obtaining delinquent returns. This person is the government’s “bill collector.” The Revenue Officer has a wide arsenal of weapons to facilitate collection, including the seizing and selling of your home and other assets. Never, never underestimate the power of the Revenue Officer. Unlike other creditors, the IRS does not have to go to court to collect monies owed to it.
The Special Agent
The Special Agent is responsible for enforcing the criminal tax laws. The agent is special because he or she carries a badge and a gun. Contact by a Special Agent means there is a strong possibility you are suspected of criminal violations of the tax laws and could go to jail. Never, ever talk to a Special Agent who wants to interview you without first retaining a competent criminal tax attorney to represent you.
How are returns selected for audit?
Now that you know a little about the IRS, let us look at two of the most frequent questions asked by taxpayers: “How does the IRS select returns for examination?” and “If my return is selected for examination, what should I do?” Technically, all returns are audited because of the procedure they undergo when received by the IRS. Use of the term “audit” refers to those occasions when a return is inspected by an IRS agent.
Although most returns are selected for audit by computer, some are selected manually or through audits of related taxpayers. If a partnership return is audited, the returns of the individual partners may be audited. Similarly, returns of shareholders and executives may be audited along with their corporation.
Types of Audits
There are several types of audits, including correspondence audits, office audits, and field audits. Correspondence audits involve simple issues which can be clarified through the mail, including deductions for interest, taxes, contributions, medical expenses and simple miscellaneous deductions.
For an office audit, you will be requested to go to an office of the IRS. This type of audit is limited to a few specific categories of deductions or income and will only take a few hours. You generally receive a computer-generated letter in advance, setting forth the items on your return the IRS wants to discuss with you and what you should bring to the audit.
In field audits, the Revenue Agent comes to your residence or place of business. The Revenue Agent will generally telephone you in advance and ask for an appointment. These audits are detailed and may take many days to complete.
The goal of the IRS in auditing your return is to find unallowable deductions, and/or unreported income. This will cause you to pay more tax to the IRS. Your goal is to minimize or eliminate any additional tax. Whenever the Revenue Agent determines income has been unreported or improper deductions have been taken, you should never admit anything until a full evaluation of the Revenue Agent’s position can be made.
The most important aspect of the audit is to be completely prepared. Preparation does not start when notified of the audit; it starts by keeping good and accurate books and records throughout the year.