IRS Audits Archives

Are you Out-of-Luck when the IRS cannot be convinced that its Assessment is Incorrect?

It happens. The IRS audits you and makes an assessment that you know is wrong. Maybe you missed the audit appointment, and the auditor disallowed all your deductions. Or maybe the IRS has a 1099 or W-2 showing that you have unreported income and you have never heard of the issuer. If you just can’t get the IRS to listen to reason, one of your options is an Offer-in-Compromise based on Doubt-as-to-Liability.

What is an Offer-in-Compromise?

An Offer-in-Compromise is an agreement with the IRS to pay less than the full amount of the assessment. Usually, the basis for this offer is based on the inability to pay the amount before the Statute of Limitations runs. The IRS accepts these offers after doing a financial analysis and concluding that it’s their best option to collect.

The Offer-in-Compromise due to a doubt-as-to-liability is the less well-known sibling to the offer based on lack of potential to pay. Rather than submit financial information, you submit your evidence one last time as to why the assessment is in error. It gives the IRS the option of settling the issue without going through the expense of going to court and possibly losing.

What’s Different about DATL Offers?

There are two major differences. First, the offer can be very low. Second, you are not submitting information about your personal or business financial condition which is full of potential problems if there is an error on the form.

How Much Should You Offer?

This all comes down to how strong is your case. The more likely the IRS is to lose in court, the smaller your offer should be. The minimum I would suggest is $150 so that they can feel like the offer at least covers their processing costs. If it’s a 50-50 likely win for both parties, I would be inclined to make an initial offer between 30 and 50 percent. There will be an opportunity to negotiate the final amount.

Conclusion

All is not lost when it comes to assessments that you believe are in error. Try to use the regular appeals processes first. But if that does not work, then an Offer based on doubt-as-to-liability is well worth trying.

Avoiding the IRS Accuracy Penalty

The IRS accuracy penalty is a charge that the IRS imposes on taxpayers who file inaccurate tax returns. The penalty is equal to 20% of the amount of taxes that are owed as a result of the inaccuracies. This can be a hefty amount so it’s worth considering what you can do to minimize their potential.

What is the biggest cause of the IRS Accuracy Penalty?

The biggest cause of the accuracy penalty is underreported income. Computer software matches all the 1099s and W-2s reported by 3^rd parties to the tax returns and automatically generates a CP2000 Notices proposing changes for anything not on the return.

How can you avoid the IRS Accuracy Penalty?

The easiest and surest way to avoid matching problems is to file an extension and check your IRS transcripts when the income and wages are posted in early June.

If you need to file before June, it’s still a good practice to check the income and wage transcripts. Should you find a difference, immediately amend the original return with a 1040X. A timely correction makes it very hard for the IRS to claim you were negligent.

What about Information Return Errors?

The IRS process millions of information returns and a fair number of them are in error. In theory, it’s up to you to contact the 3^rd party issuer and ask them to correct their filing. Lots of luck with that approach. The fallback is to make sure that your return reflects the total income reported. Then deduct the error with a note on the return explaining the error.

Conclusion

The accuracy penalty can be big bucks. Avoiding the penalty is far easier than dealing with them after the IRS finds unreported income and automatically assesses the penalty.

Common mistakes that will earn you an IRS Audit

The IRS tries to keep its processes for selecting returns for audit a secret. However, we do know some of the general steps. The majority are selected by computer-generated scores that are based on how different an individual return is from an average return. The higher the score, the more likely the return will be sent to an audit group for audit consideration. Stacks of these returns are assigned to individual auditors. These auditors will look over the returns and decide which they find to be audit worthy.

Here are some common mistakes that will make it more likely to pique that auditor’s interest:

Lots of rounded numbers. This is saying to the auditor that my bookkeeping is lacking and there are probably tax dollars to be found here.
Non-cash charitable contributions. The IRS knows that most people fail to get receipts, overvalue the junk they donate, and will not spend the money on a professional valuation when required.
Large amounts of business travel or auto expenses. This is almost an automatic adjustment in an audit. Most business owners will not keep the logs required to document the business purpose, dates, and amounts. Every new IRS auditor learns this within the first 10 audits they perform.
Hobby losses. How earners with losses from a farm, horse ranch, race car, etc. are likely to get an IRS call to schedule the audit date. Auditors know that the burden of proof to prove there is a real business purpose for these losses has shifted from the IRS to the taxpayer.
Unreported 1099s or W-2s. Not having enough compensation or gross receipts at least equal to the totals that 3rd parties have sent to the IRS is an almost guarantee that you will be spending some time with the audit division.

Most of these mistakes can be avoided. Simply don’t use rounded numbers or report a lot of non-cash charitable contributions without getting proper documentation. Keep the auto logs or be prepared to see at least 50% thrown out in an audit. If you are not sure what 1099s have been reported to the IRS, file an extension and check your IRS transcripts when the wage and income transcripts are usually updated in July of each year.

Burden of Proof

January is the month to receive IRS information forms such as W-2s and 1099s. Inevitably, some of these forms are going to wrong. Who has the burden of proof to correct these errors? The answer is that it’s you, the taxpayer. IRC 7491 does shift the burden to the IRS, but only if you are in court and have introduced “credible evidence” with respect to the issue. Bottom line, you can save yourself a lot of time and headaches by fixing the problem yourself before the IRS computer systems issue a letter.

This is a two-step process:

Contact the issuer and ask them to correct or amend the form. If the issuer will not fix their error or cannot be contacted, move on to step 2.
Gross up the income on your return to cover the error and take a deduction to offset it. Here is the critical part of this step – include a statement explaining the problem and deduction. Failure to explain and document this error could get you off on a very bad footing in an audit.

You could, of course, call the IRS and ask for their assistance with this problem. Lots of luck even getting them on the phone.

Is the IRS coming for You?

The Inflation Reduction Act (which apparently has nothing to do with inflation) included $79.6 billion more dollars for the IRS over the next 10 years. This has created a lot of commotion along the lines that IRS auditors are going to be everywhere.

Let me point out a few things that should reduce anybody’s anxiety over this concern:

The spending increase is over the next 10 years during which the baby boomers in the IRS are retiring in record numbers.
Currently, the IRS has some 8,000 revenue agents. The headcount 10 years ago was 13,000 and in the mid-1990s it was over 15,000. The expected new hirers will bring the levels of revenue agents up to about 17,000 at the end of the 10 years.
Training new agents will take close to one year and will require the IRS to remove some of their better agents from the field. This means everyday people are not going to see any expansion of IRS audits for the next several years.
The federal government has rarely demonstrated the ability to be effective at anything it does. The IRS is no exception and can’t even answer their own phones.

The idea that IRS auditors are going to be banging on everybody’s door is very much overblown.

How do you prove a negative to the IRS?

One of the hardest and most irritating problems to work with the IRS is when someone has issued a W-2 or 1099 with an incorrect social security number on it. Generally, what happens is that you receive an IRS notice of proposed changes to your tax return for unreported income. The notice includes a list of 3^rd party 1099s and W-2s issued to your social security number. One of those 1099’s, for say $20,000, is from some company that is not even in your part of the country.

Calling up the IRS and complaining about this does nothing. The IRS’s position is that it is up to you to prove that the 1099 is in error. Several people I have known over the years have given up at this point and just paid the additional taxes.

However, there are better options:

1. Call the company on the form and try to get them to amend it.
2. Fill out IRS Form 2624 giving the IRS permission to contact the payor. The IRS will race at a snail’s pace to contact them, but this is usually enough of a prompt to get it fixed.
3. If this does not work, it’s possible that you are a victim of identity theft. You should call the IRS and request an IP PIN.
4. The next step is to file a Form 911 with the Taxpayer Advocate Service. One of their primary purposes is to get the bureaucracy to correct errors when its processes fail.
5. Finally, if it’s enough money, consider an Offer-in-Compromise due to Doubt as to Liability. Make an offer of $150 to cover the processing costs and hopefully, the IRS will let it go at that.

What is so irritating about this issue is its unfairness and the IRS response that this is your problem, not theirs. Luckily, most of the millions of 1099s and W-2s are issued with correct id numbers.

Strategy 4 – Audit Reconsideration

If your tax debt is the result of an IRS Audit, do not overlook the possibility of getting the IRS to reverse the audit assessment. The Audit Reconsideration as explained in Pub 3598 is a process to get some relief from audit results you do agree with or an assessment made by the IRS because you did not file a return.

You may request audit reconsideration if you:

- Did not appear for your audit
- Moved and did not receive correspondence from the IRS
- Have additional information to present that you did not provide during your original audit
- Disagree with the assessment from the audit

The IRS recommends you use form 12661 to explain your dispute. New information is the key to getting this process to work. It is critical that you provide all the documentation with the request. Requests without documentation enclosed will be denied out of hand. You can use this process as long as the assessment is outstanding.

Your reconsideration request will be accepted if you:

- submit information that has not been considered previously.
- filed a return after the IRS completed a return for you.
- believe the IRS made a computational or processing error in assessing your tax.
- The liability is unpaid, or credits are denied.

This is a relatively cheap process to get rid of an IRS debt if you have the grounds to pursue it.

IRS ‘Math Fix’ Goes Too Far

One of the current problems at the IRS as pointed out by Tax Advocate Service’s 2018 Annual Report to Congress was the blurring of the lines of when has a tax return been audited vs. a math error correction. This is an important distinction. An audit comes with the right for judicial review plus numerous notifications while a math correction is an automatic assessment that just happens with only one letter.

There are 17 types of errors that the IRS considers to be math errors. Some of them have nothing to do with math and are errors in reporting ID numbers such as claiming a dependent and mistyping their social security number. The result is the disallowance of deductions and credits without the taxpayer having access to the processes that an audit would have allowed. Worse, the return is still eligible for additional assessments giving the IRS a second bite at the apple.

Allowing the IRS the ability to correct an obvious math error is a benefit for both the government and the taxpayer. It’s an efficient fix. But they are taking it way too far when they start making adjustments because some ID number does not match. Disallowing deductions for a child because the social security numbers do not match is not a math error. Maybe the deductions should be disallowed, but shortchanging the taxpayer’s rights for judicial review is not the right approach.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Can IRS Tag Your Boss, Friends, and Neighbors?

Can the IRS contact your friends, neighbors, and employer? This is the government, of course they can. But the tax law does require them to give you reasonable notice. So when should you worry about this taking place, and what does ‘reasonable’ mean?

The Ninth Circuit of the Court of Appeals recently ruled that it cannot be a generalized statement referring to third parties in the whole. Instead it must be a written notice that they plan to contact a specifically named party. The Court’s reasoning was that these contacts could be very detrimental to the taxpayer. First, the contact alone was an exception to the rule that your tax information was completely confidential. Secondly there was a possible or even probable negative impact on the taxpayer’s reputation that the IRS was making inquiries.

This is great news for people in California and Arizona who are in the Ninth Circuit’s area. But, what about us in Florida? It also looks like good news for us. The IRS is adopting changes that will give everybody reasonable notice. While the IRS policy book (aka Internal Revenue Manual) still reflects their old policy of only providing a general notice in Publication 1 – Your Rights as a Taxpayer, which they mail out in all audits. There was a new memorandum issued last July with an effective date of 8/15/19. It requires IRS employees to provide written notice of who they intend to contact at least 45 days in advance.

This is a much-needed change. It allows you the option to provide the necessary documents so that the IRS does not need to contact your friends, customers, or employer.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.