Facing your first IRS audit? - by Daniel L. O’Neil

by News Editor
in Blog
on 25 April 2016
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Tax is an exciting area because it impacts every other practice area. We get questions on everything from bankruptcy to family law to personal injury settlement to international tax and beyond. However we also get the “cocktail party questions” that people have on their mind when they see the subject of tax in the MSM (such as the explosion of interest following the Panama Papers) or in other pop culture. 

Today’s tax topic comes to you from an early ‘90s sketch comedy show that is immensely quotable and saw a (timely) resurgence of interest leading up to the April 18 filing deadline last week (later than usual due to holiday this year.)

Damon Wayans channeled his legendary Redd Foxx (before Redd passed away) for a skit on the television program In Living Color. If you are not familiar with Redd Foxx, as shorthand, you can rest easy knowing that he was a hilarious celebrity with tax problems so we find him interesting historically for more than just the one reason. The Wayans sketch opened with: “Hi, this is Redd Foxx with your 1990 tax tips. Tip number 1: pay them! Tip number 2: if the IRS-man show up to your house, lie! About everything! Especially who you is!”

Tip number 1 is very sensible advice. When you decide not to pay the IRS (the royal “them”) there are consequences – penalties, interest, liens, and levies on the civil side; and a possibility of things spilling over to the criminal side. When you decide not to pay them, you are challenging the organization that put Al Capone, Wesley Snipes, Leona Helmsley, and many other rich (or wealthy) and powerful (or well-known) celebrities in the slammer for tax crimes. But it’s important to know what you owe them, really, so you can pay them that amount and nothing more.

Tip number 2 is problematic for a few reasons. If anyone shows up to your house, especially unannounced, it’s probably a criminal investigations (“CI”) agent armed with a gun that is a law enforcement officer, not your everyday revenue agent from Small Business Self-Employed (“SBSE”) or Large Business & International (“LB&I”) that is armed only with a laptop and a stack of papers during a routine audit. Even if that were not true, the minute you tell the agent a lie that is a whole separate federal criminal offense on top of the other issues that brought the nice agent to your doorstep: making false statements. It’s a Title 18 offense that works in concert with our favorite title in the United States Code, Title 26, housing the Internal Revenue Code. Outside of CI agents, the rest of the IRS is probably not going to show up on your front stoop and ask for money. Since you’re not going to be put on the spot, you don’t need to lie and pretend to be someone else; perhaps someone with a moustache or a sensible hat … but your fake persona’s wardrobe choices will be your own, as Titus Andromedon né Ronald Wilkerson taught us in The Unbreakable Kimmy Schmidt.

Rather than creating a fake identity what you actually should do is gather up all of the documents and workpapers that you utilized in preparing your return (if you prepared it) or what you gave to your preparer if you let a CPA or other paid preparer take care of the fancy paperwork for you. These are going to be among the first requests the revenue agent will make when your audit begins, after you have waited through the tedious and long Notice of Examination period.

Once the audit begins you will be issued at least one initial Information Document Request (“IDR”) with a fast deadline on when you need to respond by. Blowing the deadline, being confrontational to the revenue agent, redacting every document you turn over to make it look like it came out of the Dubya White House, or accidentally just turning over every scrap of paper in your house without respect to relevancy: these are just a few of the ways that you can start an audit off on the wrong foot if you are deciding to “DIY” because the movie studios make tax controversy life look easy and glamorous. The real truth is that making rookie-bad missteps as a Pro Se Taxpayer unsurprisingly leads to virtually-assured bad outcomes in Examination and starts you off on very weak footing as you craft your argument within 30 days to preserve your right to appeal from IRS Examination to IRS Appeals; or taking on the 90 day challenge to file something appropriate and of use in Tax Court.

When you are facing your first IRS audit it helps to have someone on your side that tells you plainly what to expect with the IDRs. They tell you what the IRS is actually looking for. They tell you how strong your tax positions really were – if you buy widgets from China and paint them blue in your basement, but you claimed a $12,000,000 credit for increasing research activities then you might get an honest opinion that the audit is probably not going to go so well for you. There are whole spectrums of cases, some that are obviously going to get closed out with no adjustment (the best outcome possible for a taxpayer) and others that you are just waiting for the CI agents to show up given the substantiality and the materiality of the indefensible tax positions taken.

That’s all to say, tax lawyers stand between you (the David) and the government (the Goliath) to help you, in conjunction with a sensible CPA we trust, figure out what you owe as your fair share of the tax burden and we advise you to pay that fair share. When we are familiar with the specifics of the tax positions you are taking we can hit the ground running if the Goliath challenges you since we can provide coverage that protects you from penalties – which is not offered if you just enter random numbers on turbotax and assume that everything will work out in the end. But if you come to us late in the party after the IRS has already challenged you, we can get up to speed on the facts and do our best to find a way back to center on what you really do owe the government as your fair share of taxes and how you can pay them off.

We explicitly don’t guarantee or promise any type of outcome or results. We also make sure you understand that past results do not guarantee future outcomes. We don’t use marketing gimmicks on signs along the highway with fun nicknames, such as the Texas Tax Wabbajack.

This blog is not tax and/or legal advice and should not be relied upon by any prudent person under any circumstances at any time. However, for your own health and wellness, you might consider not lying to federal agents when they show up on your doorstep. And keep the number of your favorite tax lawyer in your phone in case you ever need help negotiating with the IRS, or if that claimed $12,000,000 research tax credit for painting things blue didn’t turn out so well and you need to make your one call when you are down at the federal detention center over on San Jacinto Street.