It is usually impossible to get the inside scoop of how the IRS is looking at taxpayers but sometimes a retired IRS agent will provide me with some valuable insight.

Before I go into this, let’s cover some of the basics about the structure of the IRS. Generally, there are four classes of employees at the IRS. 

The Office Examiner is the person who audits personal income tax returns which can include the small Schedule Cs-the sole proprietor.  This person usually does not have a degree in accounting.  These audits are performed at the IRS office. 

The Revenue Agent will have a degree in accounting and is the person who audits large Schedule C’s and corporate income tax returns.  These audits are performed at the business. 

The Revenue Officer is the person who collects past due tax accounts.  These are the people who will give you a bad time, and they can have the worst attitudes.  When they wanted to make the IRS kinder and gentler, these are the people they wanted to tame down.  However, there are cases that involve some real big crooks, and the actions that the Revenue Officer takes are justifiable. 

Then, there are the Special Agents who work in the Criminal Investigation Division (CID) handle the fraud and criminal cases.  These are the people who pack the heaters (guns, shotguns, and rifles).  These are the kind, sympathetic, and understanding people that you will meet in the event that you are ever found to be significantly cheating on your taxes.  You see, by going after you, making a public case out of you (newspapers, radio and TV), and by putting you in jail, they can assist in the government’s goal of voluntary compliance with the tax laws.

How A Routine Audit On Excise Taxes Turned Into A Nightmare For The Taxpayer-Business Owner.

The Revenue Agent was assigned a case where a company that was manufacturing truck parts was turned in by one of its competitors.  The competitor suspected that the company was not paying the excise tax that is due on truck parts since this company was winning most of the government bids to supply the military.  The excise tax on the parts, tires and fuel is used to maintain the Federal roads.

The Revenue Agent pulled copies of the returns from the IRS and sure enough, no tax was being reported or paid. While at the company’s place of business, the Revenue Agent noticed that one of the owners had a picture of an airplane on his wall.  Since there is also an annual excise tax on small airplanes, the Revenue Agent decided to test this business owner.  So the Revenue Agent got him into a conversation about how much he loved his airplane and then the Revenue Agent asked him for copies of the excise tax returns for the plane.  The business owner acted dumb, like he didn’t know anything about it.  So the Revenue Agent gave him blank forms to fill out for the last three years. 

After receiving the completed forms, the Revenue Agent checked what tax returns were filed by the business owners and what was reported on those tax returns. Well what the Revenue Agent found was that one of the business owners had never filed personal income tax returns for the last five years.  The Revenue Agent was then able to show that the business owner committed tax fraud through his intentional disregard for the law.

This case was then transferred to the CID where it did go to a criminal trial. Besides having to deal with a criminal tax proceeding, the non-compliant business owner who didn’t file his five years of tax returns suffered more misfortune as his wife divorced him and he lost total custody of his kids.  He and his business partner still owed $250,000 in taxes plus significant penalties and interest, to the IRS.

Abuse Of The Travel & Entertainment Deduction.

Some companies like to spend large amounts on travel and entertainment and, in some industries, it is necessary.  The Revenue Agent was assigned a case where, for the size of the company, the Travel & Entertainment (T&E) expense seemed a little high.  As the Revenue Agent got into the audit, he realized that there was only one salesman-the owner-and his T&E expenses per year amounted to $250,000.

As the Revenue Agent started going through the receipts for the expenses, he noticed some interesting things. The Revenue Agent noticed receipts for mink coats, wash machines, and TV’s.  The Revenue Agent asked the outside CPA about these items and he said that they were for corporate gifts to clients.  Now the Internal Revenue Code limits gifts to $25.00 per person, per year but these were a little higher than that.  The Revenue Agent asked the accountant what the purpose of these gifts were and he said that this was the only way that the company could get the buyers’ in the retail chains to purchase the company’s products.  What the Revenue Agent was able to show was that these items were corporate bribes and payoffs to purchasing agents.  The retail chain purchasing agents were on the take.  The items were for their wives and their own homes.

Needless to say, the Revenue Agent disallowed 50% of the company’s T&E expenses due to a lack of documentation and excessive gifts for the three most recent years.

The Wedding And The Boat.

Sometimes a Revenue Agent goes out to a company and on the surface of the tax return and financial statements everything looks just normal.  But, on occasion, the unusual just jumps out at you.

In one audit the Revenue Agent following standard audit procedures came across an entry in the books for about $80,000 that looked a little unusual, so the agent checked it off and asked for the documentation.

When the Revenue Agent returned to complete the audit, the CPA sat down with the agent to go over the list of items that the agent had requested.  When the agent came down to the $80,000 item, the CPA explained to the agent that it was for the owner’s daughter’s wedding and that since the owner HAD TO invite his customers to the wedding that some or all of it was a business expense.  Now some people will try to justify anything; however, the average Joe out there can’t take a tax deduction for inviting fellow employees to his daughter’s wedding. Needless to say, the taxpayer didn’t get the deduction.

Again, sometimes when things look normal, they aren’t.  In another audit the Revenue Agent stumbled on an entry hidden in Cost Of Goods Sold (CGS).  The CGS is where material, labor and related product costs are supposed to be recorded.  So what is the total cost of a 45 foot yacht doing there?

The explanation given to the Revenue Agent was: “Oh, no!  We didn’t mean for that to happen.  Alice the bookkeeper entered that to the wrong account, and it slipped by us.”  So the agent said “I suppose that she should have buried it in another account”.  While there is a provision in the law for the use of a boat as a travel and entertainment expense, expensing a whole boat in one year just doesn’t work. Again, needless to say, the taxpayer didn’t get the deduction.

It Just Doesn’t Add Up.

The Revenue Agent was assigned to audit a small retail store.  Upon going through the books and records, the agent could not get the deposits on the books to balance to the tax return and neither could the accountant.

The agent asked the accountant to prepare a cost of living analysis for the owner and the business.  Congress has given the IRS the authority to prove the income of the taxpayer.  This is a simple task.  All deposits to your bank accounts are income unless you can prove otherwise.  However, if all of the income does not get deposited, then the second method of proving income is a cost of living analysis.  In that case, your income is equal to your cost of living unless you can prove otherwise.

Well, the cost of living analysis showed $100,000 more per year of income than what had been reported on the tax return.  Now the accountant and business owner were nervous!  The Revenue Agent then sent the case for a fraud review and the IRS authorized the taxpayer to be charged with a Civil Fraud Penalty amounting to 75% of the increase in income tax.

What Should You Do?

If you receive notice that your tax returns are to be audited or there is a knock on your door by IRS Special Agents, do not try and take this matter on your own. Instead, enlist the services of a qualified tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California to resolve these inquiries.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

Many people want to know what they are up against for failing to file and or pay by the tax deadline of April 15^th so here are some things for you to consider.

1.         Federal income tax returns are systematically checked for mathematical accuracy. If there is any money owed, you will be sent a bill. So don’t worry so much about math errors on the federal tax return as it will be caught. Generally speaking if you catch a math error after the tax return was submitted it can make sense in many instances to wait for the IRS to contact you with the changes before going through the brain damage of filing an amended federal income tax return. The tangible cost incurred for waiting will be the assessed penalties and interest for the difference between the original underpayment and the actual balance owed.

Keep in mind too that a math error on a federal tax return will also impact your state income tax return and various states react differently to errors. So you will want to reach out to your state department of revenue with any necessary adjustments as soon as they are discovered.

2.         Interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate, determined quarterly is the federal short-term rate plus 3% compounded daily. This in and of itself is not so onerous however when penalties are added in a $10,000 balance due can jump up to $15,000 in approximately 5 months.

3.         If you file a return but don’t pay all amounts shown as due on time, you will be subject to pay a late payment penalty. This penalty is on the amount of tax due at the rate of one-half of one percent for each month, or part of a month, up to a maximum of 25%, on the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. If you file by the return due date, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect.

4.         If you owe tax and don’t file on time, you will be subject to a total failure to file penalty. The total failure to file penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the lesser of $135 or 100% of the tax owed.

5.         You must file your return and pay your tax by the due date to avoid interest and penalty charges. Be mindful that the effective rate of accruals with the IRS can be as high as 8% per annum. Often times the funds necessary to pay your tax can be borrowed at a lower effective rate than the combined IRS interest and penalty rate.

6.         Properly identify each payment you are making. To ensure your payment on a bill for tax is credited properly, be sure to return the tear-off stub on your bill. Make your check or money order payable to the United States Treasury. Do not make your check payable to Internal Revenue Service as it will likely be returned by the government to you. Enter the primary social security number or employer identification number, the tax year and form number, and your telephone number on your check or money order. Do not send cash.

What Should You Do?

If you believe there is an error on your notice or bill, do not assume that the IRS will discover this on their own. The IRS will not and will continue their efforts to aggressively collect the money they say is due. Instead, enlist the services of a qualified tax attorney to resolve these errors. There are circumstances where penalties can be abated if you have reasonable cause and the failure was not due to willful neglect. Working with a tax attorney lawyer at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California is the best way to assure that your account is corrected, and penalties are abated and that you get a payment plan or settlement that works for your situation and prevents IRS collection action to be taken against you.

Description: Working with an IRS lawyer to resolve errors in your IRS notice or bill and set up a payment plan can help you avoid a tax levy and other IRS collection actions.

From time to time the IRS issues consumer warnings on the fraudulent use of the IRS name or logo by scamsters trying to gain access to consumers’ financial information in order to steal their identity and assets. When identity theft takes place over the Internet, it is called phishing.

Suspicious e-Mail/Phishing

Phishing (as in “fishing for information” and “hooking” victims) is a scam where Internet fraudsters send e-mail messages to trick unsuspecting victims into revealing personal and financial information that can be used to steal the victims’ identity.  Current scams include phony e-mails which claim to come from the IRS and which lure the victims into the scam by telling them that they are due a tax refund.

2013/2014 Tax Season Fraudulent Tax Collection Notice Scam

The most recent scam that the public has told our office involves a sophisticated fraudulent tax collection notice scam targeting taxpayers for which the IRS has filed a Federal Tax Lien.

Here is how it works: The scamsters will search public records for the filing of a Federal Tax Lien by IRS and with the information gathered from that filing will generate a form letter and mail it to the targeted taxpayer.  The letter is designed to mimic an IRS notice but it is really coming from a third party having nothing to do with the IRS.  If the recipient of the notice contacts the number listed, the person answering your call will purport to be working for the IRS.  The intended victim is told he or she owes money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, he or she is then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the person who answered your call becomes hostile and insulting.

The IRS is aware of this scam too and has confirmed that this scam has hit taxpayers in nearly every state in the country.  The IRS does not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer.

If you receive a notice regarding your taxes which do not bear the official seal of the Internal Revenue Service and an official verifiable address of an IRS office or Service Center, that is a sign that it really isn’t the IRS sending you a notice.

Other characteristics of this scam include:

• Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
• Scammers may be able to recite the last four digits of a victim’s Social Security Number.
• Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling you back.
• Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
• Victims hear background noise of other calls being conducted to mimic a call site.
• After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

The IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.

Employment Verification Contacts

If you receive a telephone call or a fax from someone claiming to be with the IRS and you are not comfortable providing the information, you should get that person’s name, badge number and office location and then contact the IRS customer service line at 1-800-829-4933 to verify the validity of the call or fax. Upon getting verification from this IRS customer service line, you may then contact the IRS employee who requested the information and provide the required information.

To Report Fraud

You may also report the fraudulent misuse of the IRS name, logo, forms or other IRS property by calling the IRS toll-free fraud hotline at 1-800-366-4484.

What You Should Do If You Really Do Have Tax Issues?

The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles and California know exactly what to say and handle the IRS.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. 

Description: The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people avoid collection action by the IRS and State tax agencies. Working with one of our tax attorneys in Los Angeles or elsewhere in California is the best bet for reducing or eliminating the amount you owe.