In my last article I stated that the exempt organization branch of the IRS was not vindictive or malicious and would not “target” conservatives or anyone else for abuse unless so directed.
However, in my experience, that is not true of the audit division of the IRS. New clients are often driven to seek my counsel because of the fear and abuse they have experienced at the hands of IRS auditors.
So today I will address the audit division of the IRS, its use of the federal tax code to impose baseless tax liabilities, and the refusal of the Tax Court to comply.
1. Our Responsibility
The federal tax law requires us to maintain books and records that adequately reflect our income and expenses. We all know this. When the IRS audits us, many agents will tell us we failed to prove our expenses and then try to impose additional tax liabilities. Many of us rollover in fear and surrender.
2. Estimated Expenses
However, the Tax Court has ruled that if we can prove that we incurred an expense but the exact amount is uncertain, then we can estimate a reasonable amount. For example, if a farmer failed to keep records of the cost of his seeds, the IRS can’t deny him that deduction for lack of records – he can estimate it in a number of ways. My first client out of law school was a funeral home that kept almost no records. We were able to estimate the cost of each funeral (the casket, embalming fees, hearse delivery fees, etc). All of those estimated expenses were allowed and the client owed very little.
3. Lack of Substance
One of the most “targeted” persons by some IRS auditors are successful business persons. For some reason these IRS agents resent that success and “target” them in the audit. One of their favorites is alleging they were paid “too much income” and then denying their corporation a deduction for those “excessive” payments.
This is a shocking situation. Here we have a salaried government bureaucrat who is often times otherwise unemployable, making a business determination that the amount of money paid to the successful business owner was unreasonable. Although this is quite a popular position taken by some auditors, it is frequently the IRS who loses in Tax Court and can even justify an award of attorney fees to the Taxpayer.
4. Old Audits and Pressure Tactics
Another of the favorite tactics of some auditors is to threaten you with additional taxes and penalties unless you consent to their proposed report. Again, many people surrender in fear. But this tactic is utter nonsense. An auditor’s job is not to trade issues or pressure you into compliance, but to get to the right result. These IRS agents are losers once again.
If you have fallen prey to this threat and settled your case in the past, don’t worry. Signing the IRS report does not close the case. If you feel you were assessed more than is proper, you can reopen the audit and have it looked at again by someone else and even pursue it in Appeals or in Court if you wish.
So folks, if you are being treated unfairly by an IRS auditor, don’t roll over and agree. And if you did agree, then Consider reopening the audit and fight. Recognize that there is help to overcome and develop the courage to use that help.