How To Attract An IRS Audit
• Create a mismatch with IRS data base files by forgetting to report interest income, independent contractor income, and K-1s from LLC, corporation, partnerships, or trusts.
• Create a mismatch with IRS data base files by estimating mortgage interests, independent contractor income, and pass through income instead of using exact numbers from forms 1098, 1099, or K1.
• Claim a number of dependents - your mom, grandpa, aunt, cousins - and huge child care expenses.
• Claim high unsupported charitable contributions.
• Claim casualty losses to increase your refund.
• While you’re on a roll, claim high medical insurance with zero reimbursements.
• Use big round numbers such as $500 or $2,000
• Better yet, dump them into "miscellaneous" deductions.
• Submit Schedule C Income from Business or Profession with an attractive net loss. Report low gross receipts and deduct few but unusually high expenses. Make the schedule even more attractive for audit by claiming deductions for home office and 100% depreciation on a car, home computer, or cell phone.
• Consistently file late returns. Don’t break tradition.
• Stand up for your constitutional rights. Join a tax protest group. Join a Barter Club. The IRS loves a cash society. They love you so much that they will even send you an invitation….. for an audit.
• Be on time. Some auditors get irritated with taxpayers who come in late for an appointment.
• Bring the right attitude with you. It makes a lot of difference.
• Bring in only what is asked for. You might be inclined to give documents that are not under question if the auditor goes fishing. You might just innocently bring the fish that he/she wants.
• Respect the auditor. He is a human being. Treat him/her like one.
• Dress modestly. This is not the ideal time for you to wear expensive jewelry. Your tax returns could be showing losses for three successive years through net operating losses. The auditor will probably wonder as to how you have been surviving all these lean years. Then you walk in with jewelry galore.
• Listen to the questions carefully. Respond carefully. Innocent questions on how you earn or how you spend have meanings behind them.
• Identify out-of-line deductions and ask the auditor to disallow them (he’ll disallow them anyway). Use reverse psychology. Apologize. In the meantime, you recapture lost credibility. Ahhhh..... Credibility, the most important word during an audit.
• Get a tax professional to represent you, unless it’s a simple standard return. Let him (includes “her”) do the talking for you. A CPA, tax lawyer, or enrolled agent can save what you pay him.
• Ask your representative to go without you. You pay him not only to represent you but also to give you peace of mind. Let him worry about it while you sleep. Bear in mind that he can negotiate better without you in the room. Most auditors are rigid, formal, and righteous in your presence. Two tax professionals have a better chance of reaching a settlement without you in the room.
• Remember the magic word: Credibility. Take it with you to your audit.
• Don't be late. It doesn't make a good first impression.
• Don't walk in without records. Be cool, but don't be too cool.
• Don't dump a paper bag in the auditor's face. Don't try to have him wade through paper bags of messy documents. A happy auditor may not necessarily favor you but an angry auditor certainly will not help you.
• Don't volunteer information. Be informed that a typical agent is a low key, friendly agent. They get your guard down by playing a nice-guy role. Don't be deceived by it. Remember that he (including "she") is not on your side. He appears to be, but he is not. If you get fooled by this relaxed atmosphere and you start talking, then you are indeed a fool.
• Don't be a chatterbox. The rare clients that I brought with me are scared to talk before the introductions, and then become conversational when they find out that the auditor is not a mean dude after all.
• Don't fight the auditor. Don't tell him to go after the Mob instead of small fish like you. Remember: he did not choose to audit you. Somebody else did. He was given a case file to work on and he is just doing his job. He could make life more difficult for you, you know.
• Don't ever bribe an auditor. Don't even think about it. If you think you have a problem now, wait until you bribe him. Your call will go directly to Criminal Investigation Division (CID).
• Don't be overconfident especially if you know something about taxes and audits. This is definitely not the time for an ego trip.
• Don't underestimate the skills of the auditor. The agent is a professional. He does this kind of thing for a living. Compared to his skills, you're an amateur.
• Represent yourself if there are difficult issues at hand. What you are trying to save could cost you a lot more down the line. This is not the time to save a penny to pay a buck.
Why You Should Go To Appeals
• The Appeals Officer is neutral.
• The Appeals Officer is independent.
• The appeals process is quicker. The new IRS emphasizes the reduction of time to resolve tax cases by delegating more authority to frontline Appeals Officers to resolve cases quickly.
• The Appeals Officer has a mission: to settle tax controversies without litigation.
• The officer is more open-minded to the merits of your case to avoid hazards of litigation.
• Your bargaining position is enhanced as you no longer have to deal with a combative agent who may have been locked into certain positions on unagreed issues.
• It may force an unreasonable agent to rethink a position if you signify your plans to appeal.
• The Appeals Officer is more open and candid than government attorneys during formal discovery procedures in a court of law.
• The appeals process gives you more time to find out about the IRS' position.
• It also buys you time to decide on which trial forum you eventually want to use - the Tax Court, Court of Federal Claims, or US District Court.
• Tax, penalties, and interests need not be paid until the case is settled.
Why You Should Not Go To Appeals
• The Appeals Officer may raise new issues that were overlooked, ignored, or deemed irrelevant by the prior agent. If there are issues that are critical against you, stay away from appeals.
• Interest accrues as your case drags on.
• The strain of an unsettled IRS audit may be too heavy for you. You may just prefer to pay.
• There are additional fees for representation by an attorney, CPA, or enrolled agent. (These fees, however, may be offset by savings in reduced tax, penalties, and interest charges when you are adequately represented).
• Non-docketed settlements with Appeals Office have less finality than docketed tax court rulings.
• Read A-Z Tax Tips below for more information on appeals.
Go to appeals. In my 33 years of dealing with the IRS, it is by far the best forum to settle tax controversies. The Appeals Officer is a mediator, not an opponent. Compared to office auditors and field revenue agents, Appeals Officers are a welcome sight. It is quite challenging sometimes to deal with young or overzealous examiners who wear police badges to enforce the law. It is quite expensive to litigate in tax court. I have found Appeals Officers (usually veteran CPAs or attorneys with master’s degrees) easier to deal with. They are more understanding, possess a wider perspective on running a business and and have a better grasp of life in general. They understand how we survive to make ends meet. They are just more reasonable to deal with in putting your case to rest.
IRS auditors can now access a Custom Comprehensive Report about you. It contains:
• Birth date, professional license, driver’s license, DMV registration, accidents.
• Properties owned with addresses, type of neighborhood you live in.
• Bankruptcies, liens, judgments, UCC filings.
• Number of people at work, possible associates, transactions with relatives.
• Criminal records, concealed weapons permit.
Beware - The pendulum has swung back from a gentler & kinder IRS to an agency bent on enforcement and compliance. They have clearly moved back to the business of audits and collections. The new IRS Commissioner stressed “rigorous enforcement programs” to reduce the “tax gap” and help balance our budget.