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How to Fight the IRS
There Is No Need to Play Ostrich
April 15 had come and gone; and your 1040 is out the door. For the wise and lucky, the IRS refund is in the pockets or at least on the way. What to do with this money is a happy question, which I have discussed in two of my articles: When You Get That Tax Refund and How not to Waste Your Tax Refund Money .
For many others, they must face the dark side – that much dreaded IRS audit. The number of audits has risen each and every one over the last ten years. And with the pile-up of the federal budget deficit that can reach the Moon, get ready for increased scrutiny by Uncle Sam. In fact, additional $400 million has been earmarked for tax enforcement in 2010.
So obviously more Americans may become IRS targets. But what should you do if you are in its crosshair? You are not going to play ostrich and hope the issue will go away. And you are not going to produce any lame excuses or outrageous arguments. If you believe you are right, follow these few steps and you can give yourself a chance to make your case and win.
Don’t pick a fight . The IRS is one of the most powerful government bureaucracies on Earth; a routine audit could drag you into years of endless frustration and sleepless nights. Even if you manage to prevail in the end, the wounds and bruises you have suffered would make you wonder if it’s worth all efforts. Besides, you enjoy many privileges as a U.S. citizen or lawful resident, so it’s only moral to fulfill your obligations as a taxpayer: work the legitimate jobs, claim only what’s yours, keep a clean record, and file your return properly on time. This is a sure way to stay a winner, because you can’t lose if there is no fight.
Don’t be messy . The importance of good recording keeping can’t be emphasized enough. The W-2 forms from your employer, the 1090 forms from your bank and stockbroker, and of course the all-important 1040’s, etc. should be kept in good hands. Generally, you should keep returns and all supporting documents for at least three years from the original due date, including extensions. Even better, save all records for at least seven years. That’s because if you didn't report income that should have been reported, and if it is more than 25% of the income shown on the return, the audit period doesn't run out until six years after the return was filed. These are your weapons and ammunition in your fight. Keep them in good order as they are usually needed in a hurry when the occasion arises.
Don’t delay . If you are one of the unlucky few who got caught in Uncle Sam’s fishing net, this is not the time to play ostrich; and putting the audit notice on the bottom of your junk mail pile would not make this serious matter go way. Be sure to take the appropriate action within the required time frame, usually thirty days. It’s okay to ask for a postponement if you think you need more time to prepare. Otherwise the audit request becomes a final assessment and goes straight to the collection department with no grace period, which means stiff penalties or even possible prosecution.
Don’t fight alone , if going gets tough. It’s true that more than half of audits are conducted by mail, with the IRS simply requesting documentation such as receipts and transaction records on a specific part of your return. You can handle this type of paper work without help if you keep a good record. But if Uncle Sam would like to see you, it’s not for lunch. In this case, you may want to bring a pro with you, ideally an experienced CPA. The tab won’t be cheap, likely from $500 and up, but he or she can save you from falling into a deeper hole. The good news is that if you have hired someone or used software (e.g. “H & R Block at Home” or “Turbo Tax”) to prepare your return, the price you paid would normally cover audit assistance.
Don’t volunteer information . As any lawyer would tell you: “Don’t say more than you have to.” In any audit, anything you say will be recorded and potentially used against you. Many people make the mistake of being overly chatty, due to either over-confidence or nervousness, and give out unnecessary small bits of information that later get them into deeper trouble. So answer one question at a time, and play it close to your chest. This is not easy for someone who is not experienced – another reason not to fight alone, because you may not even have to go at all if you have hired a representative.
Don’t give up . If you can’t convince your in-office auditor but still feel you have a good case, ask to speak to a supervisor. Stay calm and be professional here, as you are not a customer in an electronic store and therefore not king. If that doesn't help either, consider taking your case to an IRS appeals office. Should this fail, too, consider going through the legal system, which allows you to slug it out at the U.S. Tax Court, the Federal District Court or the U.S. Court of Federal Claims. Again, you may not want to fight alone when you get into this sort of situation, and only if your stake is substantial enough for the messy process and high costs that come with litigations.