How to Handle IRS Audits and File Appeals

The IRS auditor sits with you and combs through all your files and receipts. They collect all your information and after all that, they slap you with a huge bill. You’re now nauseous and possibly scared because there’s no way they’re right. So now you want to file an appeal. You should know that IRS agents grudgingly refer to the internal appeals process as the “gift shop” because so many taxpayers are able to downsize the amount of taxes, interest and penalties owed by appealing their audit.

A potential downside to appealing is an appeals officer may determine you owe more after uncovering issues missed by the initial auditor. IRS appeals agents are entirely independent of the opinions and conclusions of audit agents. They have a lot of discretion in looking over audits. You could end up with a bigger tax bill than when you started. Although this rarely happens, consider the following as you might want to skip the internal IRS appeals process and go straight to federal tax court.

Writing a Protest Letter

For an audit within the IRS, you must file what’s called a protest letter within 30 days of the date of the examination report showing taxes are due. The protest letter should include:

• Identifying information such as your name, address and phone number
• A statement that you wish to appeal the IRS findings
• A copy of the letter with the findings you’re appealing
• The tax years involved
• What specific conclusions you disagree with and why
• The facts supporting your position
• The tax law on the issue

If the amount the IRS says you owe is $25,000 or less for any tax year, you can make what’s called a small case request instead of filing a formal protest. While the process is informal, your request still must be in writing and made within 30 days of the date of the letter determining you owe taxes. If you decide to hire a lawyer to represent you in the appeal process, he must be qualified to practice before the IRS. You need to sign a power of attorney authorizing your lawyer to access confidential information at the IRS.

What to Expect in Appeal Negotiations

Appeal negotiations take place in person or by mail. The negotiations are informal. An appeals officer has power to settle a dispute based on what the IRS calls the hazards of litigation. This means you’ll be more likely to get your tax bill lowered by convincing the agent there’s a significant chance the IRS could lose in tax court. The IRS considers:

• Specific facts of your case
• Chances of both you and the IRS being able to prove the facts at a trial
• The strength of your legal arguments
• The practical realities of litigating the particular issue in court

All of this may sound super intense, but basically the agent looks at negotiating the specific issues involved rather than entertaining a reduction of the overall tax bill. If there’s an agreement, the appeals agent will prepare an agreement called a stipulation. You’ll then discuss payment of the remaining tax. If you can’t reach an agreement, you can appeal the audit results to the federal tax court.

Questions for Your Attorney

• Should I appeal or just pay the tax in my case? Tell me why.
• I filed a protest letter. What’s my next step?
• Do I need an attorney to negotiate with IRS appeals officers?

You’d think this would be a simple question with a simple answer; however, there are different time periods for different types of conditions. Here are a few:

1) If you owe additional tax, and you’ve followed the law then hang onto everything for 3 years.
2) If your reported income has a discrepancy of more than 25% than keep it all for 6 years.
3) If you file a claim for a loss from worthless securities then save files for 7 years.
4) However, if the IRS believes you filed a fraudulent return, then there is no limit to the time you’d need the documents to defend yourself.

The point is it varies considerably. Best bet is to keep them for as long as possible, just in case. There are many ways to store them in such a way as not to take up too much room. Get creative!

Here is the link for the IRS’s explanation. Scroll down about 3/4 of the way down, and look for “How Long To Keep Records.”

http://www.irs.gov/publications/p552/ar02.html

Yes.

The requirement to file an income tax return is not determined by whether you owe taxes or not, so you must file if you meet all other criteria. In other words, if you earned $26,000, for example, but paid enough taxes via payroll withholding, you still must file.

Beyond that, you may want to file; you will get a refund of any withheld taxes, or are eligible for the earned income credit or other refundable tax credits, or could get a stimulus payment, or to get Social Security credits.

If you don’t file, you will get a surprise letter from the IRS, who will be glad to file your taxes for you and will! The practice of the IRS is to assess what they estimate you owe, not considering any deductions you could be eligible for on your tax form. It may take up to a few years, but they will be in touch and the bill could be in the thousands of dollars.

We hear this all the time from fringe groups and radicals. Seriously, if you think you aren’t required to pay taxes because the 16th Amendment to the Constitution wasn’t ratified and you don’t pay your taxes to the IRS, you could find yourself owing large amounts beyond your taxes because of late fees, court fees, IRS audits and numerous penalties. What’s more, you could end up in jail.

“But 16th Amendment Wasn’t Ratified”

Oftentimes, individuals or groups will break out this claim whenever they’re not particularly happy with a politician or simply don’t want to pay their share of the tax burden. They aim to convince you that federal taxes are unconstitutional. Their argument is that federal taxes are unconstitutional because not all fifty states ratified the 16th Amendment to our constitution. What they fail to mention, or simply realize, is that it’s not necessary for all fifty states to ratify an Amendment in order to implement it as U.S. law.

Some will go as far as advertising and conducting seminars (to make money for themselves, mind you) just to teach others how they can use the 16th Amendment to justify not paying federal income taxes, and people all across the country are falling for it! There are plenty of court rulings throughout the American court system that confirm the amendment was indeed ratified. It takes three-quarters of our fifty states to ratify an amendment to the US Constitution. Most Americans don’t know that.

It’s easy to fall victim to someone who wants to tell you information you’re only too happy to hear. Their motive isn’t altruistic, they want to sell you a book or assess a fee to attend an “exclusive” workshop or sell you a packet with all the materials you’ll need to become a protester of federal taxes. Unfortunately, if you follow their advice, most likely you’ll end up a convicted federal income tax evader. More money will be spent in penalties than you would have spent just paying your taxes up front. Do you really think these con artists follow their own advice?

The Top Excuses not to File Taxes

The IRS has an entire section on their website dedicated to “The Truth About Frivolous Tax Arguments.” We encourage all those considering not paying their federal income taxes to visit their site IRS Tax Pros. “The Truth About Frivolous Tax Arguments” includes information on frivolous tax arguments in general, frivolous tax arguments in collection due process cases and penalties for pursuing frivolous tax arguments. According to the IRS, these are the arguments used against the requirement to pay federal income taxes:

• A. The Voluntary Nature of the Federal Income Tax System.
  1. Contention: The filing of a tax return is voluntary
  2. Contention: Payment of tax is voluntary
  3. Contention: Taxpayers can reduce their federal income tax liability by filing a “zero return.”
  4. Contention: The IRS must prepare federal tax returns for a person who fails to file
  5. Contention: Compliance with an administrative summons issued by the IRS is voluntary
• B. The Meaning of Income: Taxable Income and Gross Income.
  1. Contention: Wages, tips, and other compensation received for personal services are not income
  2. Contention: Only foreign-source income is taxable
  3. Contention: Federal Reserve Notes are not income
• C. The Meaning of Certain Terms Used in the Internal Revenue Code.
  1. Contention: Taxpayer is not a “citizen” of the United States, thus not subject to the federal income tax laws
  2. Contention: The “United States” consists only of the District of Columbia, federal territories, and federal enclaves
  3. Contention: Taxpayer is not a “person” as defined by the Internal Revenue Code, thus is not subject to the federal income tax laws
  4. Contention: The only “employees” subject to federal income tax are employees of the federal government
• D. Constitutional Amendment Claims.
  1. Contention: Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment
  2. Contention: Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment
  3. Contention: Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment
  4. Contention: Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment
  5. Contention: The Sixteenth Amendment to the United States Constitution was not properly ratified, thus the federal income tax laws are unconstitutional
  6. Contention: The Sixteenth Amendment does not authorize a direct non-apportioned federal income tax on United States citizens
• E. Fictional Legal Bases.
  1. Contention: The Internal Revenue Service is not an agency of the United States
  2. Contention: Taxpayers are not required to file a federal income tax return, because the instructions and regulations associated with the Form 1040 do not display an OMB control number as required by the Paperwork Reduction Act
  3. Contention: African Americans can claim a special tax credit as reparations for slavery and other oppressive treatment
  4. Contention: Taxpayers are entitled to a refund of the Social Security taxes paid over their lifetime
  5. Contention: An “untaxing” package or trust provides a way of legally and permanently avoiding the obligation to file federal income tax returns and pay federal income taxes
  6. Contention: A “corporation sole” can be established and used for the purpose of avoiding federal income taxes

Sure, most of us would jump at the chance to not pay federal income taxes, but using any of the arguments above won’t make that a reality. In spite of this, people continue to fall for the promises made by those claiming that paying federal income tax is avoidable if you simply follow their sage advice.

The IRS understands there are people out there trying to make a buck off of gullible taxpayers and have started going after these con artists. They’ve provided a form on their website for reporting abusive tax promotions and/or promoters. Visit Report Tax Cons for the form and instructions on how to submit it.

Significant Tax Protesting Court Cases

1. Miller v. United States, 868 F.2d 236, 241 (7 th Cir. 1989) (per curiam)
2. United States v. Stahl, 792 F.2d 1438, 1441 (9 th Cir. 1986), cert. denied, 479 U.S. 1036 (1987)
3. Knoblauch v. Commissioner, 749 F.2d 200, 201 (5 th Cir. 1984), cert. denied, 474 U.S. 830 (1986)
4. United States v. Foster, 789 F.2d 457 (7 th Cir.), cert. denied, 479 U.S. 883 (1986)

Please visit the IRS website for more information on relevant case law pertaining to anti-tax law evasion schemes: http://www.irs.gov/businesses/small/article/0,,id=106507,00.html

This is a tricky one. It changes every year, so you will have to visit IRS.gov to be sure you’re clear or check the instructions for the various return forms (you can find these at the local post office or library) for specific details that may affect your need to file a tax return with the IRS each year. To be sure, you must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive.

Even if you don’t have to file, here are eight reasons why you may want to file:

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