Oct 22, 2010

Don't Fear the IRS - Thanks for calling me out on this one....

Recently, I received a comment from a reader who stated (and I paraphrase), "Don't scare me and don't always send me to an accountant to fix a problem."

The reader was anonymous - and the reader was correct. So, first, let me apologize to "anonymous" and to any other of my readers who does not feel empowered information on this website. To "anonymous"- again, I apologize profusely - this blog is meant to empower you. Specifically, the site is meant to do two things:

1. Empower consumers to solve their IRS problems through knowledge of how to fix specific problems, and
2. Equip taxpayers to solve their own problems with practical advice and helpful information

"Anonymous" was spot on in their comment. And I thank you for calling me out on it. Most people can solve their own tax problems themselves - and sometimes you just need some help. I hope IRSMind can help you or point you in the right direction to someone who can help you.

And thanks to all of you who have taken me up on the free Offer in Compromise help. I have benefited from providing this help by learning that people can solve their problems themselves, with a little help from a friend.

My offer still stands as well as if you have a problem you can always just ask for some help at IRSMind@gmail.com

Thanks again "anonymous" for calling me out - I hope I can help you in some way in the future.


Oct 21, 2010

5 Rules you must follow if you have an IRS Audit

Each year, 140 million taxpayers file their tax return hoping that it will not be audited by the IRS.

If fact, a study done by the independent IRS help website easyIRS.com shows that being subject to an IRS audit is the biggest concern of taxpayers. Last year, that concern was a reality for almost 1.6 million individual and business taxpayers who were audited by the IRS.

This year, with increasing pressure from the Congress to shrink the “tax gap” (the difference between what taxpayers actually pay in taxes versus what they should pay), the IRS is more serious than ever in its efforts to examine if taxpayers’ returns are accurate or not.

If you are unfortunate enough to be subject to an IRS audit (that is about 1 out of every 100 taxpayers), there are 5 rules you must follow to get the best results from your IRS audit:

1. Prepare for your audit by knowing what the IRS knows – this means you should request what is in your IRS file to see if you and the IRS have discrepancies. Because most IRS audits are related to small businesses or specific IRS issue areas, you should also read and understand how the IRS will audit your type of business and/or your issues- these are called the IRS Audit Technique Guides. They are published at www.irs.gov. One issue that the IRS has recently expressed a great deal of interest in auditing is "cash intensive businesses." The Audit Technique Guide for these businesses is very informative on what to expect in this type of audit.

2. Know who in the IRS is auditing you- this matters! Correspondence and office audits are very limited in scope- usually looking at one to three issues on your tax return at most. However, field audits are more extensive and are aimed at finding unreported income. Field audits are rare, so if you have a “Revenue Agent” at your door, you may want to consider getting experienced, professional help. Most correspondence and office audits can be handled yourself without expensive professional representation.

3. Do a mock audit of yourself- review your return and reconcile each line item with your documents. If you do not have documents, try and reconstruct them. Know however that certain deductions need contemporaneous documentation (an example is charitable contributions in which you must have your documentation at the time your file- reconstruction is not permitted). At the least, if you do not have documentation or cannot reconstruct your receipts, provide detailed workpapers and explanations of what was the entry on the return. The IRS is allowed to take “oral testimony” to substantiate deductions. Even if they do not allow the deduction on your return, they may waive any accuracy penalty if you can show your diligence in preparing your return.

4. Ask for everything in writing and respond with everything in writing – this will eliminate confusion and make the audit progress quickly and methodically. It will also alert you to the issues that the IRS is questioning. The IRS requests information and states what they are auditing on a specific form called an “Information Document Request” or “Form 4564.” Insist that all requests for information be in writing and on this form. The response to the IRS should also be in writing, clearly answering the questions posed and providing explanations of any documents attached. Keep a copy of all correspondence as it will be your “evidence” should any dispute arise.

5. Ask the IRS for a second opinion- your auditor’s decision is not final. So don’t fret if you owe at the end – most people owe at the end of IRS audits (about 9 out of 10 according to the IRS). However, what most people do not understand is that the decision of the auditor is not final if you request an “appeal” in a timely manner. When the IRS gives you its final decision, called a “30-day letter,” you have exactly 30 days to request someone else to review the auditor’s decision. The reviewer, called an IRS Appeals Officer, can reconsider your facts and may offer you an “Appeals Settlement.” The “AO” can offer this alternative because they can consider the “hazards” and nuisances of the IRS having to litigate your case. So, if you have an argument that the auditor would not consider, including your oral testimony, getting a second opinion may help greatly.

After your audit is over make sure you keep your records of the audit for at least 6 years. Keep these records longer if you have to pay any additional taxes owed in an IRS installment agreement or other alternative payment arrangement. You never know if an IRS interpretation of a rule will be overturned and you can request the IRS to reconsider your audit.

One final piece of advice with an IRS audit: ignoring an audit is not a good idea. It ultimately leads to more taxes owed and more years being audited.

Follow these 5 rules in an audit and you will get the best results.


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