For Small Business Owners & the Self-Employed

Insider Secret:

3 Ways To "Cripple" an IRS Audit

If you think you can adequately represent yourself before the IRS, please consider this true story

by Alex Goumakos, CPA

Note: The following is adapted from Chapter 17 of Gold Mine Tactics: The Business Owner's Success Manual.

About two years ago a friend of mine we’ll call “Jeff” -- not his real name -- had his personal tax return audited by the IRS. I was not his CPA at the time. For some unknown reason (actually, I feel it was the accountant’s fee), Jeff decided -- foolishly -- to handle the situation himself. He figured he would just be honest and use a no-nonsense, direct approach…

Then came the initial meeting with the Internal Revenue Officer.

Jeff’s worst nightmare manifested itself in the form of a handicapped Revenue Officer. Yes, you read that right. The Revenue Officer assigned to Jeff’s case was wheelchair bound. Try telling your hard luck story -- which Jeff tried to do -- to a paraplegic Revenue Officer.

Not even Mother Theresa would have stood a chance.

The Revenue Officer refuted nearly every piece of corroborating evidence (Jeff, by the way, didn’t keep the greatest accounting records). To make matters worse, Jeff walked into the audit meetings with information that was never requested.

[Jeff was trying to build a case based on economic hardship – which was true – and he tried to show the agent that other family members had loaned him money to pay for business expenses – partially true. He had no loan documents, of course, and the agent refused to accept signed letters from the other members of his family. Result: the loan money was considered income.]

To make a long story short, Jeff was initially assessed additional tax, interest and penalties to the tune of almost $12,000. He was, as you can imagine, distraught. That’s when I stepped in.

After calling the agent and reviewing the case, it was discovered that he was arbitrarily disallowing a section 179 depreciation deduction and reclassifying it as regular depreciation. This caused Jeff to lose out on expenses he was entitled to take. When I asked the agent to provide me with authoritative guidance as to why the deduction was changed, he said, “It was a mistake.” I also got the agent to drop the loan proceeds as income.

After everything was said and done, the assessment was changed and Jeff ended up with a total revised tax bill of about $5,800 (yes, he wasn’t a saint either). The morals of this story are this:

1. NEVER attempt to go through the audit process without qualified and experienced representation. Hire a tax attorney, CPA or Enrolled Agent. Yes, it will cost you money in professional fees, but think real hard of what it may cost you in the final analysis.
   
   
2. Don’t take ANYTHING the IRS tells you at face value. I don’t care who you talk to, IRS agents are human beings and have the same emotions as you and I (envy, jealousy, anger and dare I say it? Deceit!) Get everything in writing and ask them what Code sections, Revenue Rulings, etc, they relied upon.
   
   
3. Keep your mouth shut. Answer only the questions they ask, NOTHING MORE! Don’t offer any additional information whatsoever. It may come back to haunt you.

Yes, it’s a kinder, gentler IRS these days, but when dealing with them, remember this: You can never be too sure, too prepared, or too quiet!