IRS Examinations – Individual Taxpayers

IRS Examinations – Individual Taxpayers

Most taxpayers fear an examination (commonly referred to as an audit) of their tax return.

Over the past couple of weeks, I’ve written a blog giving you an “introduction” to the examination process, linked here, and also written about a taxpayer’s rights in an examination, linked here

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By The Book Taxes represents clients before the IRS and state taxing authorities to help them resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications. By The Book Taxes also represents clients in 1040 examinations or audits.

The two most common types of IRS examination  of an individual’s tax returns are:

  • Correspondence audits which frequently involve requests for records to substantiate specific tax return items, such as receipts to support car and truck expenses on Schedule C of the 1040, or cancelled checks to support charitable contribution deductions. The most common issue in recent years regards the claiming of tax credits like the EITC (Earned Income Tax Credit), Dependent Child Tax Credit and the American Opportunity (AOTC) and Lifetime Learning education credits for dependents. Typically, the IRS will request, by issuing “Letter 566”, copies of birth certificates, proof of residency and proof of payment in order to substantiate these. Of the approximately 900,000 audits conducted in tax year 2018, about 75% of them were correspondence audits and almost 40%, about 330,000, related to the EITC. These are large credits with a lot of fraud associated with them.
  • The Automated Under-Reporter Program (AUR) investigates discrepancies between income information reported on tax returns by taxpayers and what was actually reported to the IRS by third parties like employers, banks, investment companies and contractors. The IRS uses a “matching” program to compare what they get from you to what they get from others reported under your SSN or EIN. Taxpayers are notified of these mismatches by a “CP2000” letter. There are more than 10 million of these letters issued each year by the IRS.

A lot of the information contained in this blog came from “The PPC Guide to Dealing with the IRS”, Volume 1, chapter 5.

If you have years of unfiled tax returns or owe money to the IRS, please call me before the IRS finds you.  I can help.

IRS Examinations – Taxpayer’s Rights

IRS Examinations – Taxpayer’s Rights

In a recent blog, I wrote about “The Taxpayer Bill of Rights” which you can link to here.

Those are general rights available to all taxpayers but there are also a set of specific rights that apply to a taxpayer whose tax return is subject to an examination or “audit”. In some cases these rights overlap and act as restrictions on what actions the IRS may take.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By The Book Taxes represents clients before the IRS and state taxing authorities to help them resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications. By The Book Taxes also represents clients in 1040 examinations or audits.

It is very important to restate this. The purpose of an IRS examination is not to punish a taxpayer or business but to ensure that the tax return filed is “substantially correct” with respect to reported income, business expenses deducted and tax credits claimed.

Here are some examples of taxpayer’s rights in an examination.

The Right to Be Free from Unnecessary Examination – one audit per tax year with some exceptions

No “Repetitive” Audits – if an item (like medical expenses) was audited in the last two tax years with no changes made to the tax return, then the IRS cannot keep auditing that expense item.

The Right to an Explanation of the Audit Process – In plain English, or any other language the taxpayer speaks along with information on appeal rights.

The Right to Be Represented – A taxpayer has the right to be represented by an Enrolled Agent (EA), Attorney or CPA authorized to practice before the IRS during an examination or interview once the practitioner has notified the IRS of the representation and submitted a completed Form 2848 (Power of Attorney) to the IRS.

The Right Not to Be Interviewed by the IRS – Let your representative do the talking. They understand the process and procedures.

The Right to Appeal an Examination Decision – A taxpayer has the right to appeal any examination decision as well as the right not to pay any proposed increase in tax until the appeal is heard.

If you have years of unfiled tax returns or owe money to the IRS, please call me before the IRS finds you.  I can help.

IRS Examinations – An Introduction

IRS Examinations – An Introduction

Most taxpayers fear an examinations (commonly referred to as an audit) of their tax return.

This essay will walk you through the basics and serve as an introduction to the topic of IRS examinations or “audits”.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By The Book Taxes represents clients before the IRS and state taxing authorities to help them resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications. By The Book Taxes also represents clients in 1040 examinations or audits.

The purpose of an IRS examination is not to punish a taxpayer or business but to ensure that the tax return filed is “substantially correct” with respect to reported income, business expenses deducted and tax credits claimed.

One question I always get asked is, “What are my odds of being audited”? In tax year 2018, there were almost 900,000 tax returns examined out of a total of 150 million individual (1040) and corporate tax returns filed. That’s a little more than one-half (0.6%) of one percent.

If you were a W-2 taxpayer with income less than $200,000, you had little chance of being audited. A corporation with assets between $10 million – $50 million had about a 5% chance of being audited. As your income increases, especially if you are self-employed, and the assets of your business increase, so will your chances of being audited.

Tax returns may be selected for examinations because they show indications that there may be unreported income, questionable expense deductions or tax credits claimed that the taxpayer doesn’t qualify for.

The IRS attaches a numerical “DIF Score” to each tax return using the Discriminant Function System. The higher the score, the higher the likelihood that the tax return in question contains the items mentioned above.

The IRS also scrutinizes questionable business or medical deductions like swimming pools, large “business use of the home” deductions and outsized (relative to income) “charitable” deductions.

Examinations  of other businesses that interact with a taxpayer could lead to the taxpayer or their business being audited.

Disgruntled ex-employees, ex-business partners and ex-wives are other sources of information that can trigger an audit.

About 75% of examinations  are conducted by “correspondence”, which means you respond to a letter (usually the CP2000) sent by the IRS telling you that what you submitted on your return doesn’t match what is reported to them by third-parties like banks, employers and investment firms.

The other 25% of the examinations  are conducted “in person” at either your business location or the local IRS office. This was pre-COVID-19.

If you have years of unfiled tax returns or owe money to the IRS, please call me before the IRS finds you.  I can help.

The Ten Biggest Mistakes Taxpayers Make When Dealing With The IRS

The Ten Biggest Mistakes Taxpayers Make When Dealing With The IRS

Generally speaking, taxpayers should never try and represent themselves before the IRS. It’s best to hire a professional (Enrolled Agent, CPA or Attorney) with tax representation knowledge and experience to represent you. They are trained in IRS process and procedure and will ensure that you make use of all your taxpayer rights.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By The Book Taxes represents clients before the IRS and state taxing authorities to help them resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications. By The Book Taxes also represents clients in 1040 examinations or audits.

The ten (10) biggest mistakes taxpayers make are:

  1. Automatically filing a joint (MFJ) return if married
  2. Non-filers filing more than the last six (6) years of tax returns
  3. Thinking that the tax return that the IRS creates for you (called an SFR or “Substitute for Return”) if you haven’t filed in a while requires you to file an actual return
  4. Not opening the mail you get from the IRS
  5. Not requesting a “Collections Due Process” (CDP) Appeals hearing
  6. Not securing a loan from a family member with a lien and repayment plan
  7. Not liquidating assets to pay current taxes to get into “compliance” for an “Offer-in-Compromise” or reduced monthly payment agreement
  8. Paying the oldest tax year(s) balances first
  9. Not paying your current year (estimated) taxes first
  10. Trying to deal with the IRS by yourself
The Taxpayer Bill of Rights

The Taxpayer Bill of Rights

Believe it or not, taxpayers actually have rights when dealing with the IRS in an examination (commonly referred to as an audit) or collections.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By The Book Taxes represents clients before the IRS and state taxing authorities to help them resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications. By The Book Taxes also represents clients in 1040 examinations or audits.

IRS Policy Statement 5-2 states the four (4) principles that (hopefully) guide the IRS’ Collection Division:

  • All taxpayers are entitled to courteous, responsive and effective service and assistance in all their dealings with the Service.
  • The IRS will observe taxpayers’ rights, including their rights to privacy and to fair and courteous treatment.
  • The public trust requires the IRS to ensure that all taxpayers promptly file their returns and pay the proper amount of tax, regardless of the amount owed.
  • While the IRS will actively assist taxpayers to comply, they will also take appropriate enforcement actions when warranted to resolve a delinquency.

There are ten (10) items in the Taxpayer Bill of Rights. They are:

  1. The right to be informed
  2. The right to quality service
  3. The right to pay no more than the correct amount of tax
  4. The right to challenge the IRS’ position and be heard
  5. The right to appeal the IRS’ decision in an independent forum
  6. The right to finality
  7. The right to privacy
  8. The right to confidentiality
  9. The right to representation
  10. The right to a fair and just tax system

If you have years of unfiled tax returns or owe money to the IRS, please call me before the IRS finds you.  I can help.

Payroll Tax Liability Resolutions Strategies

Payroll Tax Liability Resolutions Strategies

Over the past few weeks, I’ve written about payroll tax liabilities for a business and how the IRS assesses these taxes and attempts to collect them from both the business and employees within the business that the IRS deems “responsible” for “collecting, accounting for and paying the taxes” to the government.

This week I am going to discuss strategies for resolving these payroll tax liabilities.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications.

I also help business owners resolve their payroll tax problems.

The first strategy for any employee is to avoid being held personally liable for any unpaid payroll tax by the IRS. You do this by proving that while you may have had a fancy title, like “Executive Vice President”, you had no actual authority or responsibility over the preparation and filing of the payroll tax returns, processing of the weekly payroll or signing the employee’s payroll checks. You aren’t an owner and your position isn’t spoken to in the company by-laws and you have no “hire of fire” authority.

Once that’s cleared up the business has the same resolution options that are available to individuals who wish to address their tax liabilities:

  • Installment Payment Agreements (streamlined, regular or partial-pay)
  • Currently Not Collectible
  • Offer in Compromise (lump sum or deferred)

Another option is to threaten to shut the company down, make a “designated” payment to cover the “trust fund recovery penalty” and declare bankruptcy. While payroll tax liabilities are not dischargeable in bankruptcy, you may be able to work out a more reasonable payment plan with the IRS while in a Chapter 11 bankruptcy.

For a more detailed explanation of these resolution options, please contact me.

If your business is falling behind on paying your payroll taxes and filing payroll tax returns, please call me before the IRS finds you.  I can help.