Having to talk with the IRS can send shivers down one’s spine, but there are ways to make it a little less intimidating.
Whether you are working out a payment plan for taxes you owe or the IRS is auditing you, meeting an agent face-to-face can send taxpayers into a panic that could lead to some serious missteps.
CHANCES OF BEING AUDITED
First of all, audits are pretty rare. In 2014, the IRS audited only 1% of all individual income tax returns for the preceding year. If you exclude returns that included business or self-employment income, the odds fell to just 0.4%. According to IRS Commissioner John Koskinen, budget cuts in 2015 and 2016 have greatly reduced the agency’s ability to review returns for accuracy. Audit rates for individual tax returns dropped last year to a 10-year low and will fall even more this year.
In any event, the chances of being audited actually vary depending in part on how much money you earned during the taxable year. In short, the likelihood you’ll be audited is greatest if you either earn no money or you earn a lot.
If you are contacted by the IRS, here are some common taxpayer mistakes to avoid.
- Do Not Ignore The IRS: Ignoring communication from the tax man will only aggravate them, something you do not want to do. Plus, delaying may only increase your IRS problems since they have an automated collections system that will start issuing notices. Each notice will get harsher, and then the IRS may ultimately place a levy on your wages or bank account.
- Do Not Get Chatty: Yes, you do need to communicate with the IRS, but you do not need to tell them everything. The more you say, the more follow up questions you are likely to get; and that can lead to more issues for review. The common advice is to shut up and take notes. Try to answer questions with questions of your own, so you can steer the dialogue and explore your options.
- Be Humble: Do not be disrespectful to the agent, treat them as your equal. Some attorneys feel that the smarter their clients are, the more problems they cause for themselves. Acting superior will not go over well with an IRS agent. They may decide to show you who is smarter by giving you an even harder time about your taxes.
- Stay Calm: Fear, anger and neediness are not necessary and are deal killers. Remember that agents will often go to their superiors and take a position on what they think the final judgment should be against you. If you are friendly and respectful, the agent might be in your corner. If you are less than that, the agent could be strongly against you. Try to be calm.
- Don’t Rush to Pay: Do not show up to your meeting with your checkbook in hand or respond to a written notice by dropping a check in the mail. The IRS may be wrong. Often the taxpayer may not owe any money. Sometimes, they are looking for a form you did not file when, in fact, you did. Sometimes, the IRS needs to be pointed in the right direction. Another reason not to rush is just like negotiations in other areas of your life. Hurrying to get an agreement may hurt your position. Once an agreement is reached, be sure to honor it and always pay on time.
- Bring Documentation: When you meet with the IRS, try to find any possible document you can to prove your case. Receipts, canceled checks, whatever you have to give you more leverage in your negotiations. It’s nice to bring copies for the agent. The IRS will often question mileage claims. Even if you have not kept a log, you can reconstruct it by using receipts for oil changes that show mileage, or look at your calendar and reconstruct your mileage by checking sites like MapQuest. Agents do have some discretion. If you are missing bits of documentation, but get it retroactive to the IRS notice for an audit, the agent may overlook it if the rest of your filing is complete. Still, you bear the burden of proof for your case.
- Ask Questions: Regard the agent as a resource for resolving the issue at hand. The IRS will present every option available; all you have to do is ask. Some recommended questions: What am I allowed to do? Where can I find more information in writing? What are the policies? What are the rules for appealing?
- Do Not Go Alone: Tax pros recommend you hire a tax professional to accompany you to a face-to-face audit. Sometimes your representative can evade a question saying they will check with their client. If the agent doesn’t follow up on that question later, it is often forgotten. So if audited, seriously consider hiring a pro such as a tax lawyer, CPA or enrolled agent. If you can’t afford that, try one of the IRS’s tax clinics for low-income taxpayers. If you feel you have not been treated fairly, contact the Taxpayer Advocate, an independent organization within the IRS that represents taxpayers.
As you move forward, please remember this information is for educational purposes only. For specific advice, please contact a qualified professional.