Step 2-1

Where to Go for Answers

It's nice to know what tax law is, but that won't save you any dollars on your taxes. The real question is, "Where do you go to find the answer to your questions?" The IRS? The Tax Court? A tax attorney? A CPA? Your local Enrolled Agent? A public accountant? The big tax prep (IRS talk for preparation) chain? Your local newspaper? The library? Your Congressman? The President? Sylvia Porter? Jane Fonda? Dr. Ruth?

A logical first step would be a tax practitioner. Almost 50 percent of all taxpayers pay someone to prepare their tax returns. But few taxpayers fully use their tax practitioners to help them understand the tax ramifications of other aspects of their financial life. A good audit-proofing strategy demands that you think "taxes" on all aspects of your financial life. Think of the tax ramifications of everything you do, because taxes are dollars, and dollars can be saved.

Too many taxpayers never bother to think "taxes" until it's time to prepare their tax return, when they start thinking "refund." Then it's too late to be considering tax reduction strategies for a year that's gone by. Just about anyone who files a Form 1040 with supplemental schedules other than Schedules A and B could benefit from at least one tax reduction consultation with a knowledgeable tax consultant. The fee for at least one hour a year is a necessary expense you should plan for. Remember, it's tax deductible too.

AUDIT-PROOFER'S STRATEGY RULE

Find yourself a good tax consultant who's available year-round to give you guidance on legal tax-reduction or tax-avoidance strategies. Before you enter into any financial situation or arrangement, call your tax consultant and ask for advice on its tax ramification. This will help you to structure the situation to your best financial benefit, and save tax dollars. The following April 15th may be too late.

Learning to rely on the advice of a tax consultant year-round is good discipline. It will reinforce the concept of thinking audit-proofing at the same time.

Many taxpayers reading this would still rather do their own tax return, and find answers themselves to their uncomplicated, but moderately difficult, questions. Many people feel this way, not necessarily because they don't want to spend the money for tax consultation services, but because they don't think their financial affairs are so complicated that they can't handle it themselves.

And you're probably one of those who think that way, otherwise you wouldn't be reading this. Bravo for you! The more you learn about taxes and proper tax reduction strategies, the more confident you will be to face other tax challenges. And the more you think about facing an IRS auditor for instance, the more you're going to think about audit-proofing.

AUDIT-PROOFER'S STRATEGY RULE

A good audit-proofer is taxwise: he or she not only arranges financial affairs to be tax-efficient, but also takes steps to protect and preserve his or her tax efficiency by preparing early to beat an IRS audit. No one knows how many billions of dollars taxpayers have had to pay in additional taxes because they didn't think audit-proof at the right time, and didn't retain the necessary information or documentation. A good audit-proofer is always looking ahead and is taxwise during the year, not after the year.

If you're not going to rely on a tax consultant for your total tax strategy and to answer all your tax questions, you need to know where to go and where to look, before the fact.

The Tax Code- Stay Away!

The absolute last place in the world you want to look for an answer to a tax question is the Code. It's the biggest mess of mind-boggling, obfuscating, mumbo jumbo you've ever read. You'd probably have an easier time trying to understand Shakespeare in Elizabethan English.

The Code is the birthplace of such things as ACRS, ESOPS, zero bracket amounts, cafeteria plans, collapsible corporations, golden parachute payments, DISCs, carryover, carrybacks, rollovers, mixed straddles, LIFO, FIFO, depletion, amortization, involuntary conversions, GSOCs, DECs, IRAs, SEPs, lump-sum distributions, and VEBAs.

It is also the embodiment of such famous legalisms as "notwithstanding the above," "except as otherwise provided," "subject to such terms and conditions as may be provided," "the secretary shall prescribe," "in the case of," "in the manner provided by"...

The Code is used only by tax attorneys during court cases, by tax practitioners who like to show off, and by authors of tax books and articles who like to give their pronouncements an air of legitimacy and authority. For anyone else, the Code is not the place to go for research.

The IRS- Watch Your Step

In your quest for an answer to a tax question, the first place to check for information is, obviously, the IRS. But you have to be careful how you go about that. You have the option of picking up the phone and calling them, or you can go them at your local IRS office. If you pone in, you can ask your question of whomever answers the phone, you can listen to a pre-recorded cassette tape, or you can request published material to be sent to you. I f you go to the office (you are then a "walk-in" in IRS lingo) you won't be able to listen to a prerecorded tape, but you may find someone who will answer your question, and you should be able to pick up a booklet on the tax law related to your question.

The person you'll be talking to will be either a Taxpayer Service Representative (TSR) or a Taxpayer Service Specialist (TSS) in the Taxpayer Service Division. These people are IRS's front-line information sources. Usually a TSR will help you, but if he or she can't, then you'll be referred to a TSS.

There are many aspects to IRS's Information and Assistance Program; consult Exhibit 2-1 for a complete list of ways in which they can help you. Not particularly the Taxpayer Education Programs, which can help you in two ways: They not only provide an opportunity for assistance, but they also provide an opportunity for learning about taxes. These free programs are a good way to start learning the basics of tax law.

The IRS says the Taxpayer Service Division responded to 37.9 million telephone calls, and helped 8.1 million walk-ins in 1986. Approximately 65% of these occurred in the 16-week period from January 1 through April 26th. The IRS says their people respond with an accuracy rate of 93 percent.

There are several things you need to know about this accuracy rate. First, because the IRS hires seasonal assistors for the filing season who are relatively inexperienced, temporary employees, their accuracy rate will be lower at the beginning of the season. But after answering thousands of questions eight hours a day for a couple of months, their accuracy rate increases as they become more familiar with the nuances of the law. Therefore, if you've got a moderately difficult question, you should be somewhat suspicious of any answer you get during the first couple of months. After the middle of March, the reliability rate improves significantly.

Secondly, the IRS accuracy figures are misleading because they are skewed. About half of the telephone questions are rather innocuous and mundane. The IRS refers to them as the "10 most frequently asked questions." They include: "Where do I send my tax return?" "How long will it take for me to get my refund?" "Can I staple my W-2 to my form?" With those kinds of questions, anyone can have a 93 percent accuracy rate!

If the IRS were to publish accuracy rates according to degree of difficulty of the question, you would probably find that the error rate goes up with increasing level of difficulty. The more difficult your question, the less likely you'll get a correct answer. This has been proven many times by magazine and newspaper reporters who call numerous IRS offices with moderately difficult questions only to get variously different answers.

AUDIT-PROOFER'S STRATEGY RULE

Don't rely solely on oral advice from the IRS. Oral advice is only advisory; the IRS will not stand behind it, and it is not sustainable in any subsequent challenge by an IRS Auditor.

The reasons are obvious: First, unless you tape the conversation, you could never prove what was actually said. Second, there is the communication factor; in any conversation, what is spoken by one person may be easily misperceived by the other, particularly if either party consciously or otherwise, makes inherent assumptions in the conversation. Third, the IRS is a word factory, and the spoken words cannot be traced. Tax law is written law. The only advice the IRS stands on is published advice.

AUDIT-PROOFER'S STRATEGY RULE

Always support your position with written instructions from the IRS. Whenever you call or visit the IRS, always ask for a publication related to the topic of your question, so that you can do your own research. Do this even if you feel confident that you've gotten a concise and accurate answer from Taxpayer Service.

IRS Policy Statement P-1-157 states, "Taxpayers will assume that they can rely on the accuracy of all official publications." The IRS has a number of publications you can order, from the 184-page Publication 17, "Your Federal Income Tax," to over 90 other publications on specialized topics in the 500 and 900 numerical series. Exhibit 2-2 has a complete listing of all these publications and the type of information in each.

A note of caution is in order here. You should understand that IRS publications are good for conducting research, because they reflect the tax law that will be used by IRS auditors, but they are not good for tax tips. The IRS publications do not offer tax savings tips or tax avoidance strategies. They do not offer guidance on how to structure your financial affairs for maximum tax benefit. They are not written to save your tax dollars. They are written to reflect the views and positions of the IRS. They will not, for example, even tell you of the different Circuit Court interpretations that may benefit you.

AUDIT-PROOFER'S STRATEGY RULE

You must rely on a number of resources to find tax laws that will benefit you without unnecessary risk. This means using commercial reference material published by others outside of the IRS.

There are a number of good commercial tax preparation guides available, and it might be to your benefit to but several each tax season. Each one has its own strengths and weaknesses, so you need to try several before you find the two or three that you think are right for you. In the absence of your own personal tax consultant, you need reference materials to give you tax guidance with your financial affairs.

Make sure that the prep guide you are using is published by a recognized authority and by a leading publishing house. An off-the-wall local edition published by a small press may not be as accurate as what you are looking for.

Also, stay away from books that will get you in trouble, even if they are carried by a major bookstore chain. These are books that tell you by some twisted illogical reasoning that you don't have to file a tax return because either the tax laws or the IRS is unconstitutional. Remember that bookstore owners don't necessarily read what they sell, and just because it's a published manuscript doesn't mean it has a legitimate premise.

Additional IRS Resources

In your research you may have to consult IRS regulations ("Regs.") which can be found in some major libraries. Issued by the IRS, regulations implement the Tax Code. The Regs. are not only published by the government, but also by several major loose-leaf tax reporting services. Another place to check is your local IRS office. Most likely, there will be a set there that you use.

While at the IRS, you can also ask for information relating to revenue rulings or revenue procedures that may pertain to your research. These are guidelines published in the Internal Revenue Bulletin, the official publication of the IRS. See Exhibit 2-4 for a complete explanation of revenue rulings, revenue procedures, and the Internal Revenue Bulletin (the IRB).

There are other ways very few taxpayers know about in which you can use the IRS in setting up your audit-proofing strategy. For example, you can get personalized help in the following situations:

* You are about to enter an unusual financial arrangement, but you want to know what the tax ramifications are before you sign the contracts. * You have already entered into an unusual financial arrangement, but you want to know how to treat it on your tax return before you file. * You are in the midst of being audited and your IRS auditor proposes treating your unusual financial arrangement in a way that will result in a higher tax bill than you believe is justified. * You want to find out how the IRS treated other taxpayers in similar circumstances.

Usually, the taxpayers who avail themselves of the opportunity to use the IRS help in these situations are those who can afford to have a tax practitioner pursue it for them. Even if you want to prepare your own tax return, or do your own research, these are situations in which it may be in your best interests to pay a practitioner to obtain the right information. Whether you do it yourself or not, it is important that you at least know that these tools are available to you.

• If you want to know what the tax ramifications of a particular financial transaction would be, you can request a private letter ruling.
  
• If you have already participated in a financial transaction and you want to know how it is to be handled on your tax return, you can request a written determination.
  
• If you are in the midst of an audit, and you don't believe that the auditor is treating your unusual financial transaction properly, then you can request technical advice from the National Office in Washington, D.C.
  
• If you want to know how the IRS has treated other taxpayers in similar situations, you can review censored versions of private letter rulings and written determinations previously issued by the IRS. You need to either check with a subscriber to a loose-leaf reporting service that publishes those rulings and determinations (some tax practitioners carry them), or with an IRS Freedom of Information Reading Room located either in Washington, D.C. or in one of the regional headquarters offices.
  

Back to Step 2: Getting Correct Information From The IRS (and others)

Or, move on to Knowing What The IRS Will Be Looking For

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© 1986, 1998 to 2002, Jack Warren Wade, Jr.