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:
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.
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.
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!
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