Are IRS Audits Random?

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As tax relief attorneys, we frequently get the question, “How likely is it that I will be audited?” or “Does the IRS audit people randomly?”

IRS audits are not completely random. You may have heard that the self-employed are a more common target than wage-earners.  This is true.  Income reported on a Schedule C is, according to some, one of the most likely types of returns (or parts of returns) to be audited. According to Forbes columnist, Robert Wood, the sole proprietorship is one of the most tempting targets for the IRS.  Formation of a legal entity like a partnership or a corporation may add complexity to your business, but it is not as routinely audited as the sole proprietorship.

According to the IRS, cases are selected for audit based on a variety of factors, including statistical formula, document matching, and related examinations.

Nobody can audit-proof your return. There is always a chance that the IRS will scrutinize your income and your business filings. But there are certainly steps that can be taken to reduce the likelihood of an audit.  One of those steps is to simply avoid filing as a sole prop.

New Greek Property Tax to be Collected by Power Company

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Just a quick update on Greece’s financial crisis as it is related to taxes this time.  On Sunday the government of Greece approved a new property tax aimed at quickly raising 2 billion euros to help plug some serious budget holes.  So the tax collectors got right to work on this, right?  Nope.  In fact, tax offices around the country were shut down today as workers protested pay cuts.  However, even if tax collectors never go back to work, property owners should not expect any automatic tax relief because the new tax is to be collected through electricity bills.

It’s an open question whether or not the tax will actually be collected amid union protests and the country’s rampant tax evasion.  The government needs to get over its credibility issues by cracking down on prominent individuals and businesses that believe they are above the law and immune to taxation.  Lasting solutions for this country’s economic troubles probably involve reducing the public sector and moving towards privatization, whereas the new property tax appears to be just a band-aid.  Worst of all, experts believe that the new property tax will only worsen the country’s recession.

The Big Red Rabbit at Sac Airport

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Airport art can be massive.  The red rabbit is massive.

Airport art can be striking.  The red rabbit is striking.

Airport art is often symbolic or reminiscent of the locale.  The red rabbit . . . not so much.

Sure we have rabbits here, but rabbits are everywhere, and they’re not usually red.  So there was some degree of controversy surrounding the installation of “Leap,” the big red rabbit created by Denver artist, Lawrence Argent, now on display in the new terminal of the Sacramento International Airport.  But we’ll get used to it . . . once people (myself included) stop trying to find hidden meanings.  Besides, who says art can’t just be fun?

Other possible interpretations:

1. Red Rabbit (nutritional food for children)

2. Red Rabbit (novel by Tom Clancy)

3. Red Rabbits (song by The Shins)

My favorite interpretation: it’s a bold anti-drug statement (i.e., the opposite of a white rabbit).

GAO Releases Report Bashing IRS Whistleblower Office

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The IRS is bound by act of Congress to pay tax whistleblowers up to 30 percent of the revenue collected as a result of information they provide, so long as the amount in dispute is more than $2 million. But the Government Accountability Office (GAO) does not believe the IRS is complying like they should.

Since the Whistleblower Office was established in early 2007, IRS has received over 1,300 whistleblower submissions qualifying for the expanded program, alleging tax noncompliance by more than 9,500 taxpayers. As of May 12, 2011, IRS has paid a small number of awards under the expanded program. . . . As of April 2011, about 66 percent of claims submitted in the first 2 years of the program, fiscal years 2007 and 2008, were still in process.  ~ GAO

Of course, the IRS can’t officially say exactly how much award money has been paid to whistleblowers because it would violate the IRS’s privacy protections. The same protections apparently prevent the IRS from keeping whistleblowers in the loop as far as the status of their claims.

The Whistleblower Office is a mess.  Is it really too surprising though, that the agency charged with collecting revenue has a hard time dishing it back out?  The IRS has buried itself in minutia on these cases to, as they say, “ensure the integrity of the claim.” It’s not collecting data on the amount of time each step in the process takes, and it has failed to establish deadlines and accountability for those working these cases.  If the IRS wants this program to incentivize whistle-blowing and voluntary compliance, then it had better turn things around. If not, the Whistleblower Office is going to quickly make a bad name for itself.

See full report here.

SF Giants and Burgers- A Sign of Karma for winning it all in 2010

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Regular readers of this blog are aware that the tax attorneys at Montgomery & Wetenkamp are huge baseball fans; and great SF Giants fans. We’ve been hoping the Giants with all their injuries would still find a way to pull it together. The first major blow of the year was of course the Buster Posey injury. However, the last straw may have been today’s announcement that Jeremy Affeldt will be out for the rest of the season. My mother has been a Jeremy Affeldt fan ever since he served her hot dogs at a season ticket holder event with the charm of a young boy a few years ago. But sorry mom, you should have whispered the secrets of defrosting meat before barbequing, as he stabbed himself separating burgers with a knife… and is now joining rest of the SF Giants on the disabled list.

Offer in Compromise: The 24-month Rule

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The IRS has 24 months from the date that anOffer in Compromise is received to make its decision.  If the IRS does not accept, reject, or return the offer within 24 months, then it is deemed accepted  (IRM 5.8.8.6).  According to IRS policy, “The timeliness of case actions in an offer investigation is important not only to ensure the efficiency of the process but also is a key component of taxpayer satisfaction”  (IRM 5.8.1.2).

But lets face it, the Offer in Compromise process can be lengthy and the IRS has never been very good with taxpayer satisfaction.  It routinely takes several months just for the IRS to mark the offer as received and assign it to an Offer Examiner.  And that’s only the beginning of the process.

I have never seen the 24-month mandatory acceptance provision come into play.  Certainly the responsible IRS employee(s) would be disciplined, if not fired, for letting the 24-month period expire.  My problem with the 24-month rule is that it does not have the intended effect.  In fact, it seems like it is quite the opposite.  An astute IRS representative with a caseload he can barely keep up with will probably delay as long as he can, even though the entire process could easily be completed in 30-60 days.

Football is Here!

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Leave it to a lawyer to find interest in obscure rules . . . yes, even in football.  Official NFL rules require the following:

The home club shall have 36 balls for outdoor games and 24 for indoor games available for testing with a pressure gauge by the referee two hours prior to the starting time of the game to meet with League requirements. Twelve (12) new footballs, sealed in a special box and shipped by the manufacturer, will be opened in the officials’ locker room two hours prior to the starting time of the game. These balls are to be specially marked with the letter “k” and used exclusively for the kicking game.

Tonight I will try to loosen up and have fun instead of wondering about this “special sealed box” and whether  the balls have been properly pressure-tested at 12.5 to 13.5 pounds per square inch.

Seizure of Assets II

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Even if the IRS has identified a “won’t pay” situation, there are a number of steps and procedures that must be followed in order to legally and successfully carry out an IRS seizure. Here are some of the pre-seizure considerations:

  1. Verification of the liability. This includes notifying the taxpayer of the liability and making sure he/she understands why the amount is owed.
  2. Consideration of alternative collection methods. Alternative collection methods include Installment Agreement, Offer in Compromise, Levy, etc. Technically the IRS does not need to attempt these methods, just consider them. However, it is standard practice to actually test them out to see if the liability can be satisfied first without resorting to seizure.
  3. Cost / Benefit analysis. The seizure process is an administrative nightmare; the revenue officer must consider the red tape, time investment, and costs of seizure to see if seizure is really in the government’s best interest.
  4. Prohibited seizures. There are a number of scenarios in which the Revenue Code prohibits seizure, such as a seizure conducted on the day the taxpayer has to appear in response to a summons, or seizure of property with insufficient equity to apply to the back tax liability.
IRM 5.10.1

Seizure of Assets

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Our tax relief clients often ask us if they should be worried about the IRS taking their home or other valuable assets.  We have to be careful about the way we answer this question because the IRS certainly has the power and authority to seize assets; they do it all the time.  However, we can often predict the likelihood of seizure based on the taxpayer’s individual circumstances.

For instance, seizures will generally not be conducted where taxpayers “will pay” or “can’t pay.”  The “will pay” situation is typically one in which the taxpayer is making preparations to pay, either by selling assets, obtaining a loan, or negotiating an installment agreement with the IRS.  If the taxpayer is “Currently Not Collectible” or is in the Offer in Compromise process, then these are considered “can’t pay” situations.

On the other hand, seizures will be considered where taxpayers “won’t pay.”  This is the category of taxpayers who repeatedly refuse to file tax returns and who keep piling up tax balances year after year.  It also includes those who rely on frivolous tax arguments or who refuse to cooperate with the IRS.  IRM 5.10.1.6.

Quote of the Day

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I don’t know if I have ever shared a favorite quote.  But today I came across a little jewel that I just have to post.  The author is a Forbes contributor, Peter J. Reilly.  He says that his clients should not try to anthropomorphize the IRS (i.e., give them a human face):

IRS does not execute its mission in a holistic manner such that you are dealing with a thinking being.  If the IRS is some sort of being, it is not that its left hand doesn’t know what its right hand is doing.  Its left hand is only vaguely aware that its right hand exists.