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Audit Proofing Stratagies > Audit-Proofing and the IRS
Introduction:
Audit-Proofing and the IRS
Let's begin with a true story: In December 1979, Revenue Agent Richard
Boandl of the Philadelphia District was assigned to examine the 1977 tax
return of Thomas Treadway. Agent Boandl subsequently audited the 1978,
1979, and 1989 tax returns of Mr. Treadway.
In February 1982, Agent Boandl came to a final assessment of approximately
$247,000 in additional taxes against Mr. Treadway, who did not agree with
the assessment. Because Agent Boandl became concerned that Mr. Treadway
was selling his property and giving the funds to his companion and good
friend, Shirley Ann Lojeski, the revenue agent recommended a jeopardy assessment
against Mr. Treadway. An extreme measure, a jeopardy assessment allows
the IRS, in certain circumstances, to make an immediate assessment and
a demand for payment, and, if necessary, to proceed immediately to collect
the tax by whatever means necessary.
Agent Boandl testified in court that he never checked the real estate
records, nor did he know what funds Mr. Treadway had actually received
from the sale of his property.
Even though it was Mr. Treadway who owed the tax, on or about August
3, 1982 Revenue Officer George Jessup (a revenue officer collects delinquent
taxes) filed a tax lien against Ms. Lojeski in the amount of $247,000 and
seized $24,000 from her bank accounts. Jessup testified that he had no
approval from his superior before filing the tax lien. Prior to seizing
her property, Jessup gave no notice to Ms. Lojeski.
On September 23, 1982 an IRS appeals officer, after conducting an
administrative review, determined that the $247,000 assessment was not
reasonable and proceeded to abate the tax. But the tax lien against Ms.
Lojeski was not released until November 30, and the seized funds were not
returned until January 1983, five months after seizure.
Ms. Lojeski testified that after the IRS filed the lien:
- She was threatened with foreclosure on her farm because she didn't have the money to pay her mortgage.
- She couldn't rune her horse business because when didn't have the money to buy feed and other items.
- She lost her health and life insurance policies because she did not have the funds to pay the premiums.
- She was sued by one supplier BECAUSE she did not have the money to pay the bill.
- She had to borrow money to buy groceries.
- She was humiliated, degraded, and withdrawn.
- She didn't leave the farm because she was ashamed to meet people, and because she was afraid that Jessup would come back to the farm and remove her personal property.
- She could not sell her farm because purchasers were leery of the IRS lien.
The U.S. District Court ruled that the IRS had violated her constitutional
rights under the Fourth Amendment prohibition of unreasonable searches
and seizures, and under the Fifth Amendment guarantee of due process of
law. The court granted damages against Agent Boandl and Officer Jessup
in the amount of $67,000. (U.S. District Court, East. Dist. Pa, C.A. No.
84-3591, 01/23/85)
The IRS appealed the decision to the Third Circuit Court of Appeals,
however, where the IRS argued that Ms. Lojeski had no rights of constitutional
protection against what they did to her. The court agreed and ruled that
the IRS had not violated her Fourth Amendment rights against warrantless
seizures for the "simple reason that such actions violated no privacy
interest." The court totally ignored the fact that Ms. Lojeski did
not owe any taxes. The case was not appealed to the Supreme Court.
This is the same case you may have seen on ABC's Nightline show on
April 4, 1987.
Who's Afraid of the IRS?
Most people! They fear the awesome power of the IRS; they are afraid
of being audited and dread the consequences. It's a fear that comes legitimately,
though. For fear is the main ingredient in making voluntary compliance
work, the result of an image-building process cultivated by the IRS for
decades.
By now you have probably heard horror stories about IRS agents, from
backyard neighborhood gossip to Parade magazine articles and "60 Minutes"
on TV. You are probably already aware of the IRS's reputation for being
tough, uncaring, and bureaucratic. You may even have heard of taxpayers
who faced burly, growling auditors with the sympathy of a moon rock and
the understanding of a doorstop. If you ever had an encounter or unpleasant
dealings with tax agents or officers, you've probably already developed
fairly strong feeling about them. If you never had an experience with the
IRS, you probably have serious questions and concerns about how tough and
demanding they are.
After all, everyone knows what the IRS did to Al Capone, the country's
most notorious gangster who could not be touched until the IRS got him.
That one legendary act has probably done more for voluntary compliance
and the image of the IRS than any other event in its history. Fifty years
later, taxpayers still remark that they don't want to tangle with the IRS
because of what it did to Al Capone.
One of the more memorable IRS incidents involved Spiro Agnew, former
vice president under Richard Nixon. Here was the second highest ranking
government official in the United States government, only a heartbeat away
from being president, brought down by the IRS.
And, as if President Nixon didn't have his hands full with Watergate
and the Spiro Agnew problems, the IRS had over thirty agents conducting
the most exhaustive audit ever performed. They literally raked him over
the coals with several hundred thousand dollars in additional taxes.
The most recent media event concerning taxes and politicians involved
Geraldine Ferraro, the first woman to run for vice president. Her accountant
had not reported her husband's real estate transactions properly, prompting
immediate filings of amended returns and payments of over $53,459 in additional
taxes. Even major politicians take the IRS seriously.
These events have left their lasting impression on tens of millions
of taxpayers who have nothing but the utmost respect and the utmost fear
of the IRS. Even though the IRS says it does not know why people comply
with the tax laws, it knows it has a good thing going. It wants taxpayers
to be afraid. Voluntary compliance, though fragile, is the major support
of our tax system. There are those inside the IRS who think it is their
mission to make people afraid of them, believing the more people are afraid,
the more they'll comply with the tax laws. Events like those in Pennsylvania
are designed to project a "firm enforcement image."
IRS auditors won't go out of their way to dispel taxpayers' notions
about their image. You will find them courteous and polite, but don't expect
them to be friendly. First names are a no-no, and so are lunches and dinner.
Bringing flowers with you to the audit will not enhance your image. Instead
it will cast suspicions upon your motives, and result in a more vigorous
audit.
Remember that IRS employees are basically suspicious individuals.
They don't trust anyone, not even co-workers, so they could hardly be expected
to trust taxpayers, particularly those being audited. Forget all the business
techniques you've learned about social communication skills. When you walk
into an IRS office, you enter a different world.
The IRS in a Nutshell
The IRS is a gigantic agency with gigantic powers. Consisting of
over 102,000 employees, the IRS is undoubtedly one of the government's
largest. It has 7 regions and 63 districts with hundreds of posts of duty
all around the country. These are the enforcement people you need to be
familiar with:
- Tax Auditors conduct the audits that are usually handled in the local IRS office. For the most part, tax auditors only conduct audits of 1040 tax returns and related schedules. Occasionally, they may audit 1040s with uncomplicated Schedule C's.
- Revenue Agents conduct audits of the more complicated 1040s and business returns such as 1040s with Schedule C's, forms 1065, Partnership Income Tax Return, and 1120, Corporation Income Tax Return. Most audits conducted by revenue agents are done on site at the taxpayer's place of business.
- Revenue Officers collect delinquent taxes. You will only need to know more about them if you can't pay your audit assessment.
- Special Agents conduct criminal investigations. They sometimes carry guns, and sometimes make arrests. If one reads you your rights, you'll know you're in serious trouble.
Tax auditors and revenue agents belong to IRS's Examination Division.
The term "examination" relates to what they are really doing
when they are challenging your deductions: They are "examining"
the return. The IRS does not use the term "audit," but because
they did use it at one time, it has stuck and the entire country still
uses it. Therefore, we will continue to use it in this book.
The term "tax examiner" is also frequently used by the
IRS in its internal publication, the Internal Revenue Manual (IRM). Because
tax auditors and revenue agents use the same IRM, the term "tax examiner"
is used to refer to both categories. We will also use that term throughout
the book.
Many taxpayers go into an audit totally unprepared and hope for the
best. Some think that if they can impress the auditor that they are nice,
law-abiding, decent human beings - not common criminals - then the IRS
auditor will mellow, be sympathetic, and politely let them off the hook.
Forget it! Tax auditors are nice, decent human beings too, but most importantly,
they pay their taxes. And they don't think too kindly of others who don't.
So right off the bat you have two strikes against you in the sympathy and
understanding department:
*First, you're not one of them.
*Second, it's assumed that you haven't done everything right on your
tax return, otherwise you wouldn't be there!
In the IRS world there is only one mentality that perseveres: Us
against them. This attitude permeates the organization, from top to bottom.
Indirectly, it will even affect your audit, and your relationship with
your auditor. There may be times during the audit ordeal and its aftermath
that you will come to believe that these people are unreasonable, that
they are unconscionable, and they do not belong to the "brotherhood
of man."
This is all part of the game and part of the process of "promoting
voluntary compliance."
So how do you deal with it, you ask? The answer is, through preparation.
AUDIT-PROOFER'S STRATEGY RULE
A good audit-proofer prepares for an audit,
and when "invited" to an audit, plans strategy beforehand.
If you think about it, this is the same technique that you probably
use in every other aspect of your life. Planning and preparation are the
key ingredients of any successful endeavor, but if you've never been through
an IRS audit before, you need to know what to plan, and what to prepare
for.
- Audit-Proofing and Tax-Saving
- Exhibit 0-1: How Classifiers
Identify Significant Issues
on Individual Nonbusiness
Returns
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© 1986, 1998 to 2002, Jack Warren Wade, Jr.
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