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The TaxMasters Guy Has Some Sage Advice on IRS Correspondence Audits

The advice was so good he had to send out a press release:

On the heels of a record reporting year for taxes, taxpayers should be wary – or at a minimum more informed – about audits from the IRS, according to Patrick Cox, CEO of TaxMasters (TAXS), the leading tax compliance and repayment services provider in the nation. According to Cox, the IRS will send out a record number of audits which can be misleading and even wrong.

“Over the past few years the IRS has been shifting gears to use correspondence audits – notices mailed to taxpayers usually showing an alleged discrepancy in a tax filing and asking for a manageable amount of extra money that is owed,” Cox said. “From my experience, most taxpayers – who did their taxes online or had an accountant or friend do them – are scared of the IRS and don’t know enough about their tax filings to argue the audit. Instead of making sure the IRS assessment is accurate, I think most taxpayers just cut a check.”

The latest Taxpayer Advocate Report showed that of the more than 1.6 million Americans who were audited last year, 78 percent received a correspondence audit, while only 22 percent were selected for an in-person examination. A large majority of the correspondence audits are sent due to unqualified or overstated tax deductions.

“Returns claiming tax deductions are the lowest hanging fruit for the IRS in a correspondence audit,” says Cox. “Unfortunately, there are an alarming number of taxpayers that make simple mistakes on the amount of deductions and types of deductions they make and wind up being easy targets for the IRS. A few examples of typically-encountered discrepancies include unreported pension income, home mortgage interest, and cash charitable contributions.”

Conveniently, the Journal of Accountancy also covered the increase in IRS correspondence audits in its August 2011 issue and offers tips on how to manage them for CPA tax practioners.

According to a 2006 report by the Treasury Inspector General for Tax Administration (TIGTA), there has been a 170% increase in correspondence examinations for individual taxpayers with gross incomes or business receipts of at least $100,000 in fiscal years 2002 through 2005, while face-to-face examinations increased by 25%. Since that report, TIGTA has claimed improvements in this area but identifies work yet to be done.

At Least the Jerks in Your Family Won’t Impersonate an IRS Agent to Swindle You Out of $20k

All families have individuals who seem to rub everyone the wrong way. Whether it’s that deadbeat brother-in-law who seems to owe everyone money or the bratty grandmother that threatens to cut you out of the will if you get another tattoo, there’s always someone who nobody can seem to stand. Despite these and other proclivities of your grade-A dick relatives, they’ve got some work to do to top this guy:

A 48-year-old Hilo man is going to federal prison for 17 months for duping his cousin out of $19,250 in an elaborate swindle involving a fictitious Internal Revenue Service employee in Honolulu and fake correspondence from the IRS in California and Utah.

Hua told his cousin she was being audited by the IRS and that she could pay a lower auditing fee if she hired him to do the audit rather than have the IRS do it when he knew the IRS does not charge taxpayers to audit them, according to federal court records.

At the time, Hua offered professional accounting and tax services under the business name Tri-Y Enterprises.

To persuade his cousin to continue paying him for auditing services never performed, Hua sent his cousin threatening mail and email purportedly from the IRS in Fresno, Calif., and Ogden, Utah, and from a fictitious IRS employee in Honolulu, said Tracy Hino, assistant U.S. attorney.

Hua also had his wife and daughter sign documents stating that they too were auditors working on the cousin’s tax case, Hino said.

Go hug your bitchy grandma.

Hilo man sentenced in scheme to cheat cousin [HSA]

Thanks to the IRS, Republican Presidential Candidate Herman Cain Only Made Enough Money to ‘Buy New Golf Clubs and Move to Atlanta’

Soon-to-be failed Presidential candidate Herman Cain is best known for being the former CEO of Godfather’s Pizza. When he took the job in 1986, the Journal reports “Mr. Cain cut costs and closed unprofitable locations and said that he returned the business to profitability in just 14 months.” An impressive feat to be sure and he continued to sling pie as the CEO until 1996 when he presumably figured he could cash in nicely.

Unfortch for Cain things didn’t really work out. And whose fault would that be? The IRS, of course!

Mr. Cain said that in 1996 he struck a deal to sell his stake in Godfather’s to his partners. That’s when the IRS showed up and commenced an audit of his tax return for the year 1994, coincidentally the year he publicly challenged President Clinton on the impact of his health-care reform plan. Simultaneous audits of Godfather’s and Mr. Cain’s partners were quickly concluded, but Mr. Cain said that the audit of his personal finances dragged on until 1999.

When he finally concluded the sale of his Godfather’s stake, Mr. Cain said that its value had fallen by 75% and yielded only enough money for him to “buy new golf clubs and move to Atlanta.” As for the IRS, they claimed he owed $1.8 million in back taxes, but he said that as soon as he appealed this decision, they immediately dropped the claim and asked only for $40,000 to cover interest on “the money I didn’t owe.” Outraged, he nevertheless paid the bill to resolve the matter. He said that such treatment at the hands of the IRS happens all the time.

Godfather vs. Tax Man [WSJ]

Man Who Claimed $23 Worth of Vegetables Triggered an IRS Audit, Explains His Rationale

A couple of weeks ago, we brought you the tale of Don Dunklee, who claimed that he was audited by the IRS for a paltry $23 in vegetables from his garden. At the time, w Mr Dunklee could have come to such a strange conclusion, considering that it’s pretty obvious the IRS’s efforts at closing the tax gap would be spent in better places than the organic vegetable farmer dynamic.

And as it happens from time to time, the subject of our post reached out to us directly (Big 4 CEOs should take a hint) to explain the situation further.

You see, Don – who is a bit of inventor but not when it comes to stories about tax audits – farms as a hobby and a woman who accepted some vegetables from him stuffed a wad of cash in his pocket that he reluctantly accepted:

I work off farm for Walgreens as does my wife. We reported our entire incomes from our employer as well as the $23, and used only the standard deductions provided by the IRS as we do not have enough “expenses” to write off deductions. The $23 was a lady looking at starting her own organic farm who I refused money from. She insisted to the point she would have been offended had I not kept the money she shoved in my pocket. I kept the cash out of respect to her and reported it as additional farm income. I have a 23 acre farm that I have been building for 27 years with the infrastructure so I can have a farm business when I retire in a few years. People visit my farm to see my off grid solar/wind system, my solar charged electric scooter [Ed. note: see above], and my organic vegetable production. I give away any vegetables anyone wants as I grow much more than I can harvest for myself, in part to learn how to produce enough to make a small retirement income later on, and I like to show off my veggies/farm/lifestyle.

Then Don informed us that he fell victim to the Geithner tax malady:

I do my own taxes. I tried TurboTax for the first time (won’t again) and the $23 was reported, rightly so, as farm income. (investigator suggested I can make up to $400.00 and should consider reporting on the other income line rather than farm income during the end of our interview when she agreed our taxes were correct and made no changes). TurboTax created a form F, farm income for the $23, reported. I claimed no expenses for growing, as I do not have a true farm business.

Then Don gets to the crux of the argument behind his belief that the audit was not “random”:

Farming is my passion/hobby. Had our audit been a true random audit I believe we would have had a general agent and general tax officer doing the audit with questions and info requested related to all of my employment reported. I believe this was a targeted audit as the title of the investigator was “small business and self employed” which does not fit the nature of my return. Her questioning was often off topic from the particulars of my return (fishing?). I would not have a problem if the IRS would be honest and say something to the effect, “we would like to audit your return as we see some irregularities we need clarified.” This might help build trust in the IRS. Knowing they have powers that some consider above or outside of the law in how they deal with taxpayers I was worried. The entire process is intimidating. I do not like feeling like a criminal for being honest. I could not afford legal help, which their literature suggested, further intimidating information they provide creates the impression one is in trouble. I hope this helps clear it up a bit for you.

Giving this a little more thought, we aren’t really surprised since the IRS has shown the willingness to shake down taxpayers for a sum that wouldn’t buy you a Hershey bar in a Mad Men episode. Don told us that he doesn’t have any ill will towards the IRS but he wonders if sometimes they can be a tad misguided, “I do have a lot of respect for the IRS and their mandated task, however I wonder if their very task generates a lot of problems.”

Not sure if the IRS is into self-reflection but that’s why we have TIGTA, s’pose. Thanks to Don for reaching out to us and now that his solar-powered scooter is getting a little more exposure, KPMG (and other firms looking to reduce their carbon footprint) may have a decent alternative to the sherpas.

Area Man Pretty Sure the IRS Audited Him Because He Reported $23 Worth of Veggies on His Tax Return

How he came to this odd conclusion isn’t clear.

Donald Dunklee, a Richfield Township, Michigan, resident, says the sale of $23 worth of vegetables from his garden was enough to trigger an IRS audit.

“I understand the needs of the IRS to keep the honest people honest so to speak, but this seems like overkill to me,” Dunklee tells Michigan television news provider WEYI.

Dunklee operates a nearby drugstore and generates all the energy for his 20-acre home, the news source says. After haggling with the woman, Dunklee says he refused to take $50 for the food and instead the woman shoved $23 money into his pocket. He later reported this on his income taxes.

Another report says the whole thing went off without a hitch but Don Dunklee still felt like it was “a huge waste of time and resources.” (That’s a new one.) The Service, however, claims it was just a random audit. Right, like we’re supposed to believe that the IRS isn’t secretly mining 1040s for “hippie vegetable farmer income” to help fill the tax void.

IRS Unit Fully Intends to Make Rich People’s Audit Experience as Unpleasant as Possible

As you my have heard, being mega-rich these days has its disadvantages, including but not limited to – 1) governments getting overly reliant on the wealthy pitching in with revenues; 2) people giving you a hard time when you buy new toys; 3) your own kind selling you out.

Because times are tough and elected officials are having difficulty convincing anyone that higher taxes for the middle class are a good idea, the affluent are having the unfortunate luck to experience the rigor of the Global High Wealth Industry Group – a new unit within the IRS designed to perform the financial equivalent of a full rectal exam:

The reviews performed so far have been particularly harsh, say attorneys. Investors are being asked to turn over numerous hard-to-get documents in short order. These are “the audits from hell that your grandfather warned you about,” says Charles P. Rettig, a partner at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, Calif.

And don’t think for a second that the Service is putting scrubs on these assignments. Extra-special auditees deserve extra-special auditors:

Miriam L. Fisher, a tax attorney and partner at law firm Morgan Lewis in Washington, says the audit teams comprise “A-list examiners” drawn from around the country who are knowledgeable and experienced with various financial products and industries. The audits are so intensive that each team is handling only a few right now and they aren’t far along in the process, she says.

IRS spokeswoman Michelle Eldridge says the group is looking at “individuals who have a complex set of situations, and looking at the complete financial set up.” She acknowledged that “these cases are full audits.”

Although you would never expect an IRS audit to be as delightful as, say, your average weekend in the Hamptons but haven’t rich people suffered enough? The least the IRS examiners could do is bring something from Maison du Chocolat to bring the tension down a notch.

[via TaxProf]

Local Man Assumes Tagging of Racial Slurs on Building Is Related to an IRS Audit

Because what else could it be?

Police are trying to figure out who sprayed racial slurs in the parking lot of a Hall County building that includes offices for the Internal Revenue Service. The messages invoking the Ku Klux Klan, and obscenities directed at African-Americans were discovered by employees as they arrived to work.

Odds aren’t that bad; approximately 1 in 6. Still doesn’t explain why invoking the Klan was necessary.

The building on Oak Street in Gainesville is home to nearly a half-dozen businesses, including an IRS office. Police told Channel 2’s Diana Davis they had no evidence linking the slurs to one person working in the building.

One employee speculated that the vandals may have a beef with the IRS. “Probably someone was being audited and they were frustrated with the situation and process they were going through. More than likely this is the result of that,” said Christian Saslo.

Racial Slurs Found Outside IRS Office [WSBTV]

TRAC’s Susan Long: IRS Increasing Efforts Towards More Small Business Audits in a Perverse Fashion

Last month we mentioned a study that was done by the Transactional Records Access Clearinghouse (“TRAC”) of Syracuse University that was critical of the IRS’ trend of auditing fewer large corporations and focusing smaller business. A major concern for not only small business owners and managers but also taxpayers since they pay for the audits that are occurring.

We recently spoke to Dr. Susan Long, co-director of TRAC and AssociaSyracuse’s Whitman School of Management about the study.

Going Concern: What’s the biggest takeaway from the findings on the report?

Dr. Susan Long: The report really does two things: 1) Presents a tool [link to tool] that users can use to look up all sorts of statistics about IRS audits for any size corporation. From very small to very large, you can look at trends over a long time so that you can see how things have changed.

2) The focus of our report was to look at the continuing large drop in corporate audits even though this is a time of rising deficits. The IRS has been given more budget for agent staffing but they have not chosen to focus on the largest corporations even though that’s where, historically, the IRS gets the biggest bang for the buck.

GC: One section of the report discusses the politics of tax collection and deficits. Is the IRS and Treasury taking the wrong approach into obtaining more revenue for the Federal Government?

SL: Our role was not to judge them but to lay out what they do and look for some kind of rationale. We could not find any rationale apart from some kind of a perverse quota system. It certainly does not appear to be at all consistent with focusing where tax dollars are underreported based on their own statistics.

GC: Do you have suggestions or opinions about what the IRS can do better? Is there a way that the Service can improve the quota system or do they need to reassess their strategy altogether?

SL: The role of TRAC is not the typical policy research organization. Our role, as we see it, is to present a picture of what the government, in this case what the IRS, is doing with respect to tax audits and to leave it up to the reader to decide what makes sense.

What we did find is that IRS sets performance goals, as all agencies do, and it sets group targets, not individual targets for agents. But nonetheless they are based on how many total audits of corporations take place for the large and mid-sized industry group (“LMSB”) and then separately for the small and self-employed business unit (“SBSE”). We noticed that there was a peculiar reversal in audit rates when you got to the margin of those companies at say, with the bigger companies for SBSE audits versus what would then be larger companies but represent the small guy for the LMSB auditors. It just showed quite clearly that there was a tendency for each branch to shy away from its biggest audits and put increased efforts on its smaller guys within its unit in a very perverse fashion.

GC: Since you used the IRS’ own data to compile your study does it appear that the statistics could be the result of the flawed goals or quota system?

SL: Right. We’re all human and we respond to what we’re measured on. If those measurements are not in accord with what the priorities are [i.e. where the largest underreporting occurs], you’ll work to the measure rather than to the overall priority. This is not the first report where we’ve noticed this. In this case, what was interesting was that for a long period of time, Congress had been cutting the IRS’ budget and it’s really tough when you have more and more returns and fewer and fewer agents to cover them. You’ve really got hard choices there.

So we were very interested to see, now that we’ve entered a new era, Congress has been giving the IRS more budget for hiring more revenue agents. Therefore they have more discretion about where they will put these additional resources and they are certainly not putting them in the large corporate area.

GC: What about the IRS’ contentions that they audit 100% of companies of $20 billion in assets or more?

SL: According to their figures, the IRS audits more than 100% of all the corporations of that size. These particular figures we took from the IRS databook that is put out annually. There has only been three years where there has been a breakout with these categories.

The first time it came out the IRS said, “yes it’s over 100% but that’s because you can audit more than one year’s return in the same year” and that’s true. But then in the second year it’s over 100% and they make the same excuse. Now this is third year and it’s still over 100% [see footnote at the bottom of the study].

They’re not doing a very good job of accurately measuring that [the number of companies audited] so we presented figures that give the IRS the benefit of the doubt. They’re not measuring the size of the returns vs. the size of the audits in a consistent way, so we just grouped it with the next largest category and saw exactly the same trends in terms of the hours spent auditing the biggest companies.

Simply, there’s a tendency to spend less time on less complicated returns. As companies get bigger their businesses get more complex. When you see that sort of thing in an organization, you look at what are the goals being measured against. If they’re being measured just on quantity and there isn’t any distinguishing between that workload that takes longer to do, it’s easier to up your numbers by choosing workload that you can churn out faster. It’s human nature.

IRS Checks Sole Proprietorships Off Its “To Audit” List

This morning we shared some best practices on how to keep your ass out of hot water should an IRS audit befall you. The concern is that the government spending is out of control, huge deficits yada yada yada, the IRS will be knocking on more doors.

For the most part, everyone has been covered – large corporations, millionaires, possibly temptresses, the list is thorough.

Well, now it appears that the last entity type standing, the sole proprietorship will join the rest as an IRS target. IRS-criticizer-in-chief J. Russell George’s TIGTA issued another report but this time it cites sole proprietorships for “$68 billion of the $345 billion tax gap in 2001,” in underreported income. Web CPA reports George’s thoughts:

“Sole proprietors who underreport their income can create an unfair burden on honest taxpayers and diminish the public’s respect for the tax system,” said TIGTA Inspector General J. Russell George in a statement. “It is imperative that the IRS institutes policies to address this problem.”

How’s this for addressing a problem? The Internal Revenue Code, you my have heard, is mind-numbingly complex. Sole proprietorships, out of all the entity structures, are the least equipped to ensure compliance with the tax law. Auditing more of them will not result in increased compliance but rather enormous costs to their businesses. As for “diminish the public’s respect for the tax system,” didn’t that ship sail ages ago?

IRS to Step up Audits of Sole Proprietors [Web CPA]

Things That You Should Not, Under Any Circumstances, Do If You’re Audited by the IRS

In case you’re illiterate or generally ignorant about the reputation of our government, you know that there’s a ginormous deficit that our Congressional representatives like to crow about ad nauseam. And because squawking will only get you so many votes, many in Congress have decided that tasking the IRS (and thus setting up an easy scapegoat) with scraping together more revenues.

Accordingly, the IRS is not only hassling people for their milk money but they are also ramping up the number of audits of wealthy individuals.

The Journal warns us about this increasing number of financial DREs, noting that many rubes get the notice in the mail, freak the hell out and cut a check to the Treasury. However, if you’ve got a solid case against the Service or balls of concrete, than there are some tips that you would be wise to heed:

“Hire the wrong tax preparer” – If your tax pro had the unfortunate luck to get swept up in Operation Brass Tax, then you’re obviously in bad shape. If you’ve got the means, don’t cheap out on the Mom & Pop (sorry Moms and Pops out there) tax prep shop and find a qualified CPA, attorney or enrolled agent to guide you through this nightmare.

“The Ostrich approach” – The strategy of simply ignoring the IRS will work about as well as bulldozing your house.

“Frivolity” – In other words, the Irwin Schiff method. Arguing that the 16th Amendment to the Constitution is a one big joke never impresses the IRS or judges.

“Automatic Surrender” – You may be surprised to learn that the IRS is not the omnipotent federal agency that it may implicitly claim to be in its letter. Long story short, don’t just take them at their word, unless you’re the type that wants to pay more taxes.

Of course there are several other strategies that the Journal omits that you should want to avoid, including:

Violent Retaliation – No one wins here.

Claiming to be a celebrity – Fame has yet to prove an effective deterrent to IRS nagging.

Cry about it – The IRS, while sympathetic, will not be swayed by tears.

While everything listed above is tempting, we advise getting professional help and it probably won’t hurt to keep the proceedings cordial.

How to Fight the IRS [WSJ]