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This book gives you strategies for coping with most tax problems—audits, bills, and tax court. If you need more help, try any of these:
You can successfully take on the IRS alone most of the time. But if you feel over your head or want professional reassurance, consider consulting or hiring a tax professional.
Under the Taxpayer Bill of Rights (Chapter 15), you may have a representative handle any IRS matter for you. You never have to face the IRS alone if you hire a tax professional. You also have the right to call “time out” to consult a tax professional during the process whenever you are taking on the IRS by yourself. But you don’t have the right to free help. You’ll have to pay whomever you hire.
You can safely go it alone in the two most common, but serious, IRS situations:
But before making any decision on proceeding alone or working with a tax professional, weigh the pros and cons of each.
Pro: You save professional fees.
Con: It takes a lot of time.
You may find it very stressful.
You may say or do the wrong thing.
Pro: You gain knowledge, strategy, advice, and confidence.
Con: Most tax professionals charge for a consultation, but it will be less than if you hire the tax professional to represent you.
Pro: The IRS respects knowledgeable tax professionals.
You don’t have to face the IRS in most cases.
Tax professionals know tax issues.
Con: Tax professionals are expensive if they are good.
You understand your tax records best.
You risk hiring someone who is inexperienced or incompetent.
Myth: The IRS will think I am guilty of something if I hire a tax professional or will get mad at me for not facing them myself.
Fact: IRS auditors and collectors prefer dealing with experienced tax professionals. It makes their job easier. Good tax professionals know what the IRS wants and don’t get overly emotional.
If you face an audit, collection of a tax bill, or a tax court hearing—and you’ve decided to find a tax professional—here is what you should get:
Consultation and advice. A tax professional can analyze your situation and suggest a strategy. Rarely is there only one way to handle an IRS matter. Once you know the alternatives, you can make an informed choice. Of course, a tax professional might pitch her services. Weigh the professional’s advice against what you have learned by reading this book and your own judgment. If the tax professional suggests a course of action you believe is excessively expensive, is dishonest, or doesn’t make sense, find someone else. There are good ones and bad ones, as in any profession.
Negotiation. An experienced tax professional should know what kinds of deals can and can’t be made with the IRS.
Representation. Tax professionals know IRS procedures and how to maneuver around the IRS bureaucracy. They can neutralize the intimidation factor the IRS knows it holds over you. And, if you have something to hide, a tax professional usually can keep the lid on it better than you can.
For an audit, a collection, or an appeals problem, you can choose among enrolled agents, tax attorneys, and certified public accountants. A fourth category—tax return preparers with no professional certifications—can help you around April 15, but may not have the right to represent you before the IRS.
Enrolled agent (EA). An EA is a full-time tax adviser and tax preparer who is licensed to practice before the IRS. Most EAs cannot represent you in tax court, however. They became enrolled agents by either passing a difficult IRS exam or having at least five years of IRS work experience. They also must participate in continuing education programs to retain their EA designations.
There are approximately 24,000 EAs in the United States. EAs are the least expensive of all tax professionals. For a cost-effective approach to handling a tax problem, consider an EA.
Tax attorney. Tax attorneys are lawyers who specialize in complex tax and estate planning; others focus on IRS dispute resolution and some do complex tax return preparation. Look for a tax attorney with either a special tax law degree (LL.M.-Tax) or a certification as a tax law specialist from a state bar association. If a great deal of money is at stake, the IRS is accusing you of fraud, or you’re headed to court, call a tax attorney.
Certified public accountant (CPA). Like attorneys, CPAs are licensed and regulated in all states. They do sophisticated accounting and internal audit work and prepare tax returns. To become a CPA, an accountant must have a college degree and experience with a CPA firm and must pass a rigorous examination. Some CPAs have a great deal of IRS experience, but many never deal with the IRS. CPAs charge about the same as attorneys. As a rule, CPAs are not as aggressive as tax lawyers when facing IRS personnel.
There are several ways to find a good tax professional. Asking the IRS is not one of them.
Personal referrals. This is frequently the best source. Ask friends, relatives, and acquaintances whose judgment you trust for the names of tax professionals who helped them. If their tax professionals can’t help, ask for a referral.
Your tax preparer or accountant. Your tax return preparer or accountant should know a good tax professional who can help you deal with an IRS problem.
Prepaid legal plans. Prepaid legal plans offer basic services for a low monthly fee and discounted fees for additional work. Few lawyers in prepaid legal plans have tax or IRS experience, however. Tax attorneys rarely participate because of relatively low fees paid by the plans.
Chain tax services. Some national outfits offer audit assistance free with their tax return preparation service. One chain says they will go with you to the IRS to explain how a return was prepared. This service may fall short of actual representation. And there is no guarantee the person going with you prepared your return or is a tax expert. Not all tax preparers are created equal—not by a long shot. These folks may know how to prepare simple tax returns, but I wouldn’t rely on them to help with an IRS problem.
Advertising. Various directories, including phone books and newspapers, carry lists of tax professionals. Look under Accountants, Tax Return Preparers, Tax Consultants, and Attorneys-Tax. Some tax professionals offer a first consultation by phone or in their office at no charge. Bear in mind, however, that anyone heavily advertising or giving away her time may be new to the game.
Professional associations and referral panels. Most local bar associations will give out the names of tax attorneys who practice in your area. But bar associations don’t meaningfully screen the attorneys listed; those who are listed may not be experienced or competent. To find an EA in your area, call the National Association of Enrolled Agents referral line at 800-424-4339. To find a CPA, try calling a local or state CPA society.
Direct solicitation. If the IRS has filed a Notice of Federal Tax Lien against you, you may receive a call or letter from a tax professional. Be wary. In general, good tax professionals are too busy to do this.
Once you have the name of a tax professional, call and ask to speak with him directly. If he is too busy to talk to you—and your call isn’t transferred to another tax specialist—assume the office is too busy to handle your case. Call the next person on your list.
When you speak to a tax professional, try to develop a rapport. Mention how you got his name, especially if it was a personal referral. Then get to the point—tell him your tax problem. If he doesn’t handle your type of case, ask for the names of professionals who do.
Here are some other suggestions for making a good match:
If you lose faith in your tax professional, find another one fast. But don’t dismiss the first one until you get a second opinion on her work. And don’t fire a tax professional simply because nothing is happening. Frequently, inaction is because the IRS is dragging its feet. Be patient—delay often works to your advantage in dealing with the IRS.
Get an understanding about the tax professional’s fees at your first meeting. Does she charge by the hour or a flat fee? Professionals can charge anything from $35 to $350 per hour, depending on where you live, the type of case, and the tax professional. To some extent, you can control costs. Tax professionals can be hired either as consultants, meaning you handle your own case and ask for advice as needed, or hired to represent you from start to finish. In other words, hiring a tax professional need not be an all or nothing affair.
Although uncertainty about open-ended fee arrangements leaves most folks uncomfortable, many good tax professionals won’t quote a flat fee. But they should be able to ballpark a range of hours necessary for your case. For example, I usually figure five to 15 hours of my time for full representation in an office audit or a collection matter. For appeals, field audits, and tax court cases, I put in ten to 40 hours.
Most tax professionals require a fee and cost retainer paid in advance, often equal to the minimum time estimated as needed on the case. For example, on a typical collection case, I require a $1,500 retainer.
If you’re being pursued by a tax collector or you’re headed to tax court, the information in this chapter, and in Chapters 5 and 6, should guide you in your decision about using a tax professional. Audits, however, require special attention—spending a small percentage of your potential IRS exposure for professional help can be a wise investment for the peace of mind and confidence that good advice brings. Before reading this information, however, read the information above and Chapter 3.
If you consult a tax professional, bring your IRS audit notice, tax return, and documents on which the return was prepared to the first meeting. If you face an office—as opposed to a field—audit, go over the audit letter checklist with the tax professional—explain why you reported your income as you did or took the deductions that the IRS is now questioning. Ask the tax professional what documentation will help you prove your position.
If you face a field audit, your audit won’t be limited to any pre-prepared list of items to be examined. This makes a field audit more difficult to prepare for than an office audit. Show the tax professional your return and ask which items he would expect the IRS to question. Next, ask him if he sees any legal problem areas and how to deal with them. You might ask the tax professional to photocopy some supporting tax law authority or prepare a memorandum of law pertaining to your case to show the auditor.
Finally, ask the tax professional for suggestions on how best to explain and present your documents to the auditor. You may want his assistance in making summaries or spreadsheets showing your business or investment transactions. The more clearly you present information, the less time you will spend with the auditor. Auditors appreciate and, more importantly, reward well-prepared taxpayers.
If your tax professional was the preparer of the tax return, ask her to explain all figures and schedules to you. If she has workpapers or notes used to prepare your return, ask for copies and interpretations, if needed. You won’t necessarily show them to the auditor—they may be just for your reference.
Using an enrolled agent is a cost-effective choice when you need representation in an audit. But if you face complex legal or accounting issues or if the IRS accuses you of fraud, hire a tax attorney or CPA. In some cases, you may need both.
Your tax return preparer may legally represent you at an audit. Or an immediate family member or business partner or employee can with written permission on IRS Form 2848. (Call 800-829-3676 to get this form.) Bringing any of these people along for support is okay, but I don’t recommend having any of them represent you at an audit.
If you handled your own audit and it did not turn out well, you might want to ask a tax professional why. He can analyze the examination report, tax return, and documents you produced at the audit. Tell him what you said and what the auditor said about items that are disputed. The tax professional can then evaluate the strengths and weaknesses of your legal position.
If the tax professional believes you are at least in a legal gray area, he may examine the quality of the documents and consider the credibility of your explanations. In an hour or so, he should be able to decide whether you should contest the IRS’s report. He may advise you to try again with the auditor or her manager, or to make a formal appeal or go to tax court. (See Chapter 4.)
IRS problems often stem from the accuracy of your tax return and who prepares it. Over half of all tax returns are professionally prepared. The Commissioner of the IRS has said that the “tax system has become so complex … something must be done to make it less burdensome.” Until this happens, consider having a tax professional prepare your returns, especially if you are self-employed.
You might also lessen your chance of being audited by having a professional preparation. Insiders say that IRS personnel (see Chapter 3) are more likely to pick self-prepared returns for audit than those signed by a reputable tax professional.
Enrolled agents, tax attorneys, and CPAs are the cream of the crop. Others may call themselves tax preparers, too. But unless they are admitted to practice before the IRS, they cannot represent you there. Fees for preparing individual income tax returns range from $50 to $2,500 and up, depending on the complexity of your return and the professional qualifications of the tax preparer.
Whether you hire a tax preparer or do it yourself, you alone are responsible for the accuracy of the tax forms. So check out the qualifications of the preparer you hire. The IRS and most states don’t license tax preparers, but states do license attorneys and CPAs. Almost anyone can call himself a tax return preparer.
Nationwide chain tax preparers’ fees may be low, but their work product is inconsistent. These McTax outfits depend on inexperienced seasonal employees earning minimum wage. Emphasis is on quantity, not quality, and workers earn bonuses for turning out a lot of returns. You may never meet the actual preparer of your return. And even if you do, chances are she won’t be around after April 15 if you—or the IRS—have questions about your return.
For most people, enrolled agents are the best bet to prepare a tax return. They are licensed by the IRS. Their prices are higher than chains, but lower than CPAs and tax attorneys. If you want a tax preparer for many years down the road, start looking long before the tax season starts and stick with her. Don’t switch tax preparers unless you have a good reason.
Never hire a tax preparer who bases his fee on a percentage of the refund you will receive, guarantees refunds in all cases, or will not sign your tax return as the preparer. If the IRS designates someone as a problem preparer, it casts out its audit net to bring in the preparer’s clients.
Although most tax matters require no research, some do. Your auditor may go beyond looking at your records. For instance, the question may be whether or not the deductions are legally allowable. Your home office expenses may be disallowed not because you didn’t prove them, but because the auditor says that you don’t qualify for a home office deduction. To find out if the IRS is correct, you must know what the legal requirements are to qualify for a home office.
There are many good sources to augment the information in this book.
The IRS offers free publications and telephone and face-to-face help. To meet with someone from the IRS in person, call your nearest local IRS office. At larger IRS offices, there are Taxpayer Assistance Centers where you can sit down and talk to a taxpayer service representative. Check the IRS website at www.irs.gov or call 800-829-1040 for the closest Taxpayer Assistance Center. Just don’t expect any tax savings tips or sophisticated advice from the IRS.
The IRS distributes free taxpayer pamphlets, nicknamed pubs, numbered from 1 to 1000. Pubs contain tax information on all kinds of issues—from the IRS’s point of view, of course. For example, Publication 334, Tax Guide for Small Businesses, has rules from how to claim depreciation of a business vehicle to reporting losses on the sale of assets.
These pubs are free at IRS offices or by calling 800-829-3676 or at the IRS’s website at www.irs.gov. Start with Publication 910, Guide to Free Tax Services, to request the tax information you need. Expect to wait several weeks to get them by mail.
The IRS toll-free numbers are 800-829-1040 or 800-829-8815. Live people answer questions on tax preparation and tax notices. You’ll be asked to give your Social Security or employer ID number if you need information about your account.
The IRS toll-free prerecorded tax information number is 800-829-4477. IRS Publication 910 has a list of the topic numbers and subjects that correspond to the prerecorded messages.
The best thing I can say about these telephone services is that they are free. They will give you only the official IRS position, which is conservative and not necessarily beneficial. And many times the answers are misleading or outright wrong (although the IRS Commission claims IRS answers are accurate over 80% of the time). Start, but don’t stop here, with your tax law research.
Many legal and tax resources intended both for lawyers and the general public are available online through the Internet. Visit any of the following websites, each of which provides links to other tax and legal information resources:
Last but not least, there is always google.com.
For hard-copy research, there are numerous privately published tax guides that are widely available.
You’ve probably seen the annual tax guides, including The Ernst & Young Tax Guide (Ballantine Books) and J.K. Lasser’s Your Income Tax (Prentice Hall).
These guides are sold just about everywhere during tax season. They cover the most current tax rules for income reporting and deduction taking. They are easier to read than IRS publications and have better examples of how the tax law works. I like The Ernst & Young Tax Guide because it’s the most comprehensive, although it is not the easiest to understand. These guides are inexpensive—$15 to $25—and found in most libraries as well.
Accountants, IRS agents, and attorneys use more sophisticated tax deskbooks. The three top professional guides are the Master Tax Guide (Commerce Clearing House), Master Federal Tax Manual (Research Institute of America), and Federal Tax Guide (Prentice Hall). They are all about 600 pages of fine print. Don’t let this scare you, as you may need to read only a few pages. These deskbooks summarize the law on the most common tax law problems. They are available in libraries, especially law libraries, and sell in larger bookstores.
IRS personnel seem to prefer the Master Tax Guide. If you have a choice of which of the three to consult, you may want to use that one.
The original source materials for the tax law are the Internal Revenue Code and Congressional committee reports. IRS regulations and federal court decisions interpret the law and show how it is applied to a set of facts. The IRC and reports are found in federal building libraries, large public libraries, and law libraries as well as on the Internet (www.irs.gov). Tax court decisions are available online at ustaxcourt.gov. Most are technical in the extreme and are only recommended as a cure for insomnia. The guidebooks listed above are an attempt to make sense out of this mass of legalese and are your better bets.
Nevertheless, if you want to look at court decisions or legal treatises, find a law library or go online. To find a library, call your local courthouse or college or a lawyer and ask where the nearest law library open to the public is located. Many private law libraries only allow use by lawyers, judges, and law students.
If you go to a library, look in the card catalogue or computer database for:
Start your research with the number of an Internal Revenue Code section, an IRS regulation, or a name of a case you have run across.
If you go the library route, once armed with the call numbers and the citation or topic, head for the material or throw yourself on the mercy of the library staff. A librarian might even show you how to use the books. But, few law librarians have great familiarity with tax law, so don’t expect too much.
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