The tax laws are quite complex, and the section of the Taxpayers Bill of Rights exempting certain properties from IRS seizure is no exception. If you have questions after reading this article or other research, contact a tax professional.
The weekly amount of wages that are exempt from IRS seizure are those that is equal to your standard tax deduction plus allowable personal tax exemptions divided by 52. The amount of exemptions varies from one type to another. For example, the amount of personal property exempt from IRS seizure is $6,250.00 for fuel provisions, furniture and household items. The amount of tools, books, machinery or equipment used in a business or profession that can be exempt is $3,125.00. Non-exempt business property may not be seized unless an IRS district or IRS Assistant Director determines that the taxpayers' other assets are insufficient to cover the tax liability or that the collection of the tax is high risk.
A personal residence is exempt from IRS seizure if the unpaid amounts is less than or equal to $5,000. When the tax liability amount exceeds the $5,000 rule, the IRS must obtain written approval from the U.S. District Court Judge to seize the taxpayer’s personal property. The IRS must then give a (30) day written notice of intent on seizing the property in order to give the taxpayer a chance to contest the tax levy if it is erroneous. During the waiting period, however, the IRS may freeze the taxpayers assets.
The tax notice must meet certain criteria including a clear description of the tax levy procedures, the options of avoiding the tax levy such as installment payments of overdue tax, and steps for redeeming your property in the event that the IRS seizes it. The bank will hold your account for (21) days after receiving notice of an IRS tax levy before releasing the money to the IRS. This freeze allows you the time needed to contact the IRS. If the IRS attempts to tax levy your property and you have already paid the overdue tax bill, if the statute of limitations has expired, or if the property is exempt under the bankruptcy rules, then you should file an appeal with the IRS to release the tax levy. Make sure that you send a written statement to the IRS district director in the district where you live and the lien was filed, informing the director of the grounds of the appeal.
Wednesday, August 5, 2009
Bill of Rights during an IRS Audit
It used to be that the IRS had a final say and a lot of rights when it came to the power over the U.S. Taxpayers. Today however, the rights of taxpayers have been increased through the Taxpayer Bill of Rights. The first act was instituted in 1989 and the second was enacted in 1996. The last of the three was implemented in 1998. While it has always been an expectation that the IRS would deal with taxpayers in a professional manner, they must now also follow another set of code of conduct policies.
Remember the following information and certainly appeal or complain if the IRS does not follow these guidelines.
While this is an abbreviated overview of the IRS tax payer's Bill of Rights, many of them can help and possibly prevent you from owing the IRS an enormous amount of penalties and fines after the IRS Audit. It is important that every citizen get treated fairly and equally. It is important that you always know your rights when dealing with an IRS Audit.
Remember the following information and certainly appeal or complain if the IRS does not follow these guidelines.
- First, the IRS must give you the tax information and any help that you need in order to comply with the IRS tax laws.
- The IRS must always ensure your personal and financial confidentiality.
- They must treat you in a courteous manner.
- The IRS must provide clear explanations in any tax notice or mail inquiries and provide additional information as requested.
- A non-technical statement of your taxpayer rights and information pertaining to the IRS collection and tax appeals procedures is required to be placed in all correspondence during an IRS audit.
- The IRS must collect the tax fairly. If the IRS threatens to collect in a manner that will cause you significant hardship, you can apply for a Taxpayer Assistance Order by filing IRS tax form 911 with an IRS Problem Resolution Office in the IRS district where you live. While your filed 911 form is being reviewed, the tax collections and enforcements will be suspended.
- The IRS must agree to a (3) year installment payment schedule if the taxpayer owes $10,000 or less, exclusive of interest and penalties if requested and certain conditions are met.
- Approval from a supervisor must be acquired before the IRS can file a tax lien or levy and the IRS must provide notice, which includes the amount of tax owed, the IRS’ proposed action, and notify the taxpayer of their right to a hearing within (30) days within (5) business days of such action. The tax notice must also include the IRS levy procedures, the availability of IRS administrative appeals, the IRS appeals procedures, and the alternatives to the proposed tax levy such as an installment agreement and the rules for obtaining a release of the tax lien.
- Certain properties are exempt from IRS seizure under the taxpayers Bill of Rights.
- Legal costs may be recovered if you win in court against the IRS and the burden of proof may shift to the IRS during court procedures with respect to factual issues relevant to determining tax liability. The IRS must also issue a tax refund of overpaid tax and must provide at least 30 days notice prior to altering, modifying or terminating and installment agreement.
While this is an abbreviated overview of the IRS tax payer's Bill of Rights, many of them can help and possibly prevent you from owing the IRS an enormous amount of penalties and fines after the IRS Audit. It is important that every citizen get treated fairly and equally. It is important that you always know your rights when dealing with an IRS Audit.
Preparing for an IRS Audit
When preparing for an IRS audit the key is to not be scared or act in haste. Read over all documents thoroughly, do some research and then begin to prepare. Familiarize yourself with what type of audit you are going through, what the IRS is requesting and why you filed the way you did. If you are unclear about anything, contact an accountant, attorney or anyone else who is registered to practice in tax court.
There are some common courses of action, which the average taxpayer is unaware of. First, you can tape record your audit meeting, but you have to notify the IRS within ten days of the tax audit meeting. Another item that you will want to educate yourself about is the ability to appeal the decisions, such as tax liens, tax levies and property seizures. Perhaps the IRS is lacking crucial information pertaining to your case, or maybe you are eligible for hardship relief.
While it isn’t necessary to appoint an accountant or registered agent, if you do enlist the help of a professional, you should give them “power of attorney”. This could be to your advantage because you wouldn’t be required to be at the meeting unless subpoenaed by the IRS. If this is the case, your registered agent can stall the process by needing to confer with you on some issues since you are not required to be present. This gives you the upper hand by giving you time to rebut the claim without being placed "on the spot".
Generally, the IRS tax audit notice will provide you with details on which part of the return is being questioned. Only provide that amount of information to the IRS. Do not volunteer or provide more documentation that what is being asked for. A simple measure, but one that many people overlook is making certain that the documentation is in the order of the request. For example, perhaps the IRS wants receipts for itemized deductions A, B and C, and they want copies of your bank statements for all of 2007. When preparing your file for your face-to-face audit, have copies, not originals, in the order of the request. Have on top the receipts for itemized deduction A, B and C labeled as such. Then follow that with copies of you bank statements from January through December in order. Paper clip those together with your request letter on the top. Appearing disorganized to an auditor will be to your detriment. The auditor will assume that your business is handled in an unorganized fashion and may feel that more mistakes may be found, which will result in higher tax penalties benefiting the IRS. The auditor may then extend the scope of the investigation. While many of the actions that you will take to combat the IRS audit, each are of high importance and can greatly affect the results. Take your time and be prepared.
There are some common courses of action, which the average taxpayer is unaware of. First, you can tape record your audit meeting, but you have to notify the IRS within ten days of the tax audit meeting. Another item that you will want to educate yourself about is the ability to appeal the decisions, such as tax liens, tax levies and property seizures. Perhaps the IRS is lacking crucial information pertaining to your case, or maybe you are eligible for hardship relief.
While it isn’t necessary to appoint an accountant or registered agent, if you do enlist the help of a professional, you should give them “power of attorney”. This could be to your advantage because you wouldn’t be required to be at the meeting unless subpoenaed by the IRS. If this is the case, your registered agent can stall the process by needing to confer with you on some issues since you are not required to be present. This gives you the upper hand by giving you time to rebut the claim without being placed "on the spot".
Generally, the IRS tax audit notice will provide you with details on which part of the return is being questioned. Only provide that amount of information to the IRS. Do not volunteer or provide more documentation that what is being asked for. A simple measure, but one that many people overlook is making certain that the documentation is in the order of the request. For example, perhaps the IRS wants receipts for itemized deductions A, B and C, and they want copies of your bank statements for all of 2007. When preparing your file for your face-to-face audit, have copies, not originals, in the order of the request. Have on top the receipts for itemized deduction A, B and C labeled as such. Then follow that with copies of you bank statements from January through December in order. Paper clip those together with your request letter on the top. Appearing disorganized to an auditor will be to your detriment. The auditor will assume that your business is handled in an unorganized fashion and may feel that more mistakes may be found, which will result in higher tax penalties benefiting the IRS. The auditor may then extend the scope of the investigation. While many of the actions that you will take to combat the IRS audit, each are of high importance and can greatly affect the results. Take your time and be prepared.
Ways to get your IRS Audit Penalty Dismissed
If you asked the IRS for tax advice, and the advice that you recieved resulted in an audit, then you may not have the tax penalty any longer. They key will be to provide accurate tax information when the IRS asks for it and show proof that you received erroneous advice.
While it is our responsibility to be informed before filing our tax return, even if we need to seek the advice of a professional, if you have made an honest mistake you may be able to have the penalty dropped. In order for this to be successful, you would need to send the IRS a check for payment of the tax and interest due, along with a letter explaining how the mistake happened. Also, ask to have the penalty eliminated. If the explanation is clear and it is easy to understand how this could be an honest mistake, the IRS may relieve you of the penalty.
There are other ways that you can avoid a tax penalty. For example, you can show that you had substantial authority for the treatment of a given tax item. To show the substantial authority some research may be needed. Research the Internal Revenue Bulletin, Court Cases, Private Letter Rulings issued by the IRS and congressional reports. Once you have found a document pertaining to your situation, and making sure that is supports your position. Be sure that the documentations that you use has substantial relation to the weight of authorities supporting the opposite tax treatment. You can then submit the documentation to the IRS along with a letter as to why you took the position you did and how your documentation reflects your situation.
You can always appeal the IRS’s decision along with taking their decision to tax court. You have the right to representation. Additionally, the period of time while you are appealing the decision your penalty will be suspended until the ruling on your case. The tax penalty for filing a fake tax return is not based on your liability and will be assessed immediately and added to any other penalties incurred.
Staying informed, conducting research and seeking advice is the best way to combat an IRS audit after it happens. Being as truthful and forthcoming as possible will aid you in the process but with caution to not provide the IRS with any more information than needed. From a letter, to some research, all the way to tax court, you have the right and the opportunity to have your case heard and ruled on by an independent party.
While it is our responsibility to be informed before filing our tax return, even if we need to seek the advice of a professional, if you have made an honest mistake you may be able to have the penalty dropped. In order for this to be successful, you would need to send the IRS a check for payment of the tax and interest due, along with a letter explaining how the mistake happened. Also, ask to have the penalty eliminated. If the explanation is clear and it is easy to understand how this could be an honest mistake, the IRS may relieve you of the penalty.
There are other ways that you can avoid a tax penalty. For example, you can show that you had substantial authority for the treatment of a given tax item. To show the substantial authority some research may be needed. Research the Internal Revenue Bulletin, Court Cases, Private Letter Rulings issued by the IRS and congressional reports. Once you have found a document pertaining to your situation, and making sure that is supports your position. Be sure that the documentations that you use has substantial relation to the weight of authorities supporting the opposite tax treatment. You can then submit the documentation to the IRS along with a letter as to why you took the position you did and how your documentation reflects your situation.
You can always appeal the IRS’s decision along with taking their decision to tax court. You have the right to representation. Additionally, the period of time while you are appealing the decision your penalty will be suspended until the ruling on your case. The tax penalty for filing a fake tax return is not based on your liability and will be assessed immediately and added to any other penalties incurred.
Staying informed, conducting research and seeking advice is the best way to combat an IRS audit after it happens. Being as truthful and forthcoming as possible will aid you in the process but with caution to not provide the IRS with any more information than needed. From a letter, to some research, all the way to tax court, you have the right and the opportunity to have your case heard and ruled on by an independent party.
Monday, August 3, 2009
High-Risk Audit Areas; Unreported Taxable Income and Self-Employment
Remember that any taxable income is reported to the IRS. From banks reporting taxable interest income, to employers supplying their copies of W-2’s, all information is entered into the IRS computer system. When you file your return, you social security number is entered into the IRS computer system, checking against what others have reported. If information comes back that you have not reported on your filing, this is an immediate red flag. Always report all income; failure to do so automatically places you in the high-risk area. The bottom line is that those 1099’s that you receive from investments, banks and other entities are just as important as any other tax document you receive.
If you are self-employed, you have a greater flexibility to cheat on your taxes by way of not reporting taxable income and inflating your deductions. The IRS knows this and has found that self-employed individuals are more likely to cheat on their taxes then a salaried employee. If you are working full time, and you receive a W-2, chances are that you are not going to change the W-2 and that you don’t have time to earn other income. With that said, the self-employed are high risk and are carefully monitored by the IRS. Additionally, others that receive a 1099 such as waitresses, cab drivers, and even house cleaners are held in the same respect because they typically receive cash payments. The IRS does look at a self-employed individual’s income and determine if the reported income can support their lifestyle. IRS manuals are available to the public and teach auditors about 100 of the most popular self-employment industries and what to look for within each industry.
While there are legitimate reasons to claim a home office deduction, it may not work to your benefit. Since the rules about claiming a home office deduction are complicated, a CPA should be used to see if you qualify. If you do qualify, it may not be worth the small tax savings that you may be entitled because this move puts you in the direct view of an IRS audit. People who claim a home office deduction are considered high risk. Since tax laws are so complicated, an audit may result in more money being spent in penalties than a home office deduction could save you for years. If you are absolutely entitled to this deduction, you have consulted a CPA, and it would result in significant tax savings then take the deduction. Just consider the fact that you will be placed in high-risk status before making that move.
If you are self-employed, you have a greater flexibility to cheat on your taxes by way of not reporting taxable income and inflating your deductions. The IRS knows this and has found that self-employed individuals are more likely to cheat on their taxes then a salaried employee. If you are working full time, and you receive a W-2, chances are that you are not going to change the W-2 and that you don’t have time to earn other income. With that said, the self-employed are high risk and are carefully monitored by the IRS. Additionally, others that receive a 1099 such as waitresses, cab drivers, and even house cleaners are held in the same respect because they typically receive cash payments. The IRS does look at a self-employed individual’s income and determine if the reported income can support their lifestyle. IRS manuals are available to the public and teach auditors about 100 of the most popular self-employment industries and what to look for within each industry.
While there are legitimate reasons to claim a home office deduction, it may not work to your benefit. Since the rules about claiming a home office deduction are complicated, a CPA should be used to see if you qualify. If you do qualify, it may not be worth the small tax savings that you may be entitled because this move puts you in the direct view of an IRS audit. People who claim a home office deduction are considered high risk. Since tax laws are so complicated, an audit may result in more money being spent in penalties than a home office deduction could save you for years. If you are absolutely entitled to this deduction, you have consulted a CPA, and it would result in significant tax savings then take the deduction. Just consider the fact that you will be placed in high-risk status before making that move.
Sunday, August 2, 2009
How Large Deducitons Play into IRS Audits
If you anticipate claiming large deductions, there is nothing wrong with that as long as you have the receipts to prove it. If your tax deductions exceed the average amount of deductions for your income level, then you may get audited. Additionally, if you have an excessive amount of itemized deductions, you may fall into a high-risk category therefore raising your chances of getting audited. While the formula used is secret, we do know that a large amount of Itemized Deductions places you in the higher probability category.
When you file your return with the IRS, a secret computer score, known as the Discriminate Information Function (DIF), is immediately used to determine whether additional taxes, fees, penalties or fines could be collected. If the DIF score returns high, you are more likely to receive an audit.
An area that most taxpayers don’t even think about as being a high-risk error in reporting, that may get them audited, is the failure to report alimony as income. When a former spouse pays the alimony, they claim it on their taxes. Likewise, you should also claim it as income. Failure to do so will result in a high-risk score, and we know what that means by now. Since the other party generally reports it, catching such errors is relatively easy.
The IRS doesn’t usually just pick taxpayers to audit. Since the IRS has little resources and to boot, they are understaffed, choosing returns that will yield the highest rate of return in the way of fines and penalties is essential. The IRS has budgets and expenses, like any other business; therefore they must cover their expenses without passing the costs of doing so on. There is a fine balance between not allowing people to get away with underpayments, which would bankrupt our system, but on the other hand not spend the taxpayer’s money frivolously. This is why the IRS has the computer system and formula available to them, to ensure that they are auditing cheating taxpayers where money is available. While it may not be ideal, an audit may be scary, and it certainly isn’t pleasant, if the IRS did not put in place checks and balances imagine what that would do to our taxes. Our individual taxes would continue to rise until the system would entirely break, leaving the taxpayers without the common things everyday that we take advantage of paid for by tax dollars. No one would be afraid of the repercussions of being dishonest on their tax returns, and very little would pay.
When you file your return with the IRS, a secret computer score, known as the Discriminate Information Function (DIF), is immediately used to determine whether additional taxes, fees, penalties or fines could be collected. If the DIF score returns high, you are more likely to receive an audit.
An area that most taxpayers don’t even think about as being a high-risk error in reporting, that may get them audited, is the failure to report alimony as income. When a former spouse pays the alimony, they claim it on their taxes. Likewise, you should also claim it as income. Failure to do so will result in a high-risk score, and we know what that means by now. Since the other party generally reports it, catching such errors is relatively easy.
The IRS doesn’t usually just pick taxpayers to audit. Since the IRS has little resources and to boot, they are understaffed, choosing returns that will yield the highest rate of return in the way of fines and penalties is essential. The IRS has budgets and expenses, like any other business; therefore they must cover their expenses without passing the costs of doing so on. There is a fine balance between not allowing people to get away with underpayments, which would bankrupt our system, but on the other hand not spend the taxpayer’s money frivolously. This is why the IRS has the computer system and formula available to them, to ensure that they are auditing cheating taxpayers where money is available. While it may not be ideal, an audit may be scary, and it certainly isn’t pleasant, if the IRS did not put in place checks and balances imagine what that would do to our taxes. Our individual taxes would continue to rise until the system would entirely break, leaving the taxpayers without the common things everyday that we take advantage of paid for by tax dollars. No one would be afraid of the repercussions of being dishonest on their tax returns, and very little would pay.
Saturday, August 1, 2009
High Risk IRS Audit Areas
While IRS audits are down due to lack of personnel and resources, there are areas that can be tweaked to avoid an IRS tax audit. Since taxpayers are now more intelligently selected in order the catch the biggest cheaters, there are some areas that we know throw up red flags.
One of the high-risk audit areas is high wages. If you make more than $100,000 your odds of being audited increases by almost half. Your chances of being audited by the IRS increases if you have a large amount of itemized deductions, especially if they exceed the IRS target amount. Another flag is if you claim tax shelter investment losses on your tax return. You may be audited if you have complex investment or business expenses on your return. If you own or work in a business that receives cash and/or tips in the ordinary course of business, then you may get audited. Other audit flags are if your business expenses are large in relation to your income on your tax return, rental expenses, a prior IRS audit which resulted in a tax deficiency, you have complex tax transactions without explanation on your return, you are a share holder or partner in an audited partnership or corporation or if you claim large cash contributions to charities in relation to your income on your tax return. Of course with any taxpayer, if an informant has given the IRS information, you can expect an audit.
With that said, you should not exclude a deduction or beef up your wages just to avoid getting audited. While less than 2% of tax payers are audited every year, it does happen and sometimes just because your industry was chosen for data purposes. Always be honest and accurately report income, deductions, losses and gains, just make sure that you have the documentation to support what you have filed in case of an audit. While these areas place you at high risk, it does not mean that you are doing anything wrong. Always take your time, read and re-read your return before signing and sending and make sure that your documentation is clear, precise and accurate.
One of the high-risk audit areas is high wages. If you make more than $100,000 your odds of being audited increases by almost half. Your chances of being audited by the IRS increases if you have a large amount of itemized deductions, especially if they exceed the IRS target amount. Another flag is if you claim tax shelter investment losses on your tax return. You may be audited if you have complex investment or business expenses on your return. If you own or work in a business that receives cash and/or tips in the ordinary course of business, then you may get audited. Other audit flags are if your business expenses are large in relation to your income on your tax return, rental expenses, a prior IRS audit which resulted in a tax deficiency, you have complex tax transactions without explanation on your return, you are a share holder or partner in an audited partnership or corporation or if you claim large cash contributions to charities in relation to your income on your tax return. Of course with any taxpayer, if an informant has given the IRS information, you can expect an audit.
With that said, you should not exclude a deduction or beef up your wages just to avoid getting audited. While less than 2% of tax payers are audited every year, it does happen and sometimes just because your industry was chosen for data purposes. Always be honest and accurately report income, deductions, losses and gains, just make sure that you have the documentation to support what you have filed in case of an audit. While these areas place you at high risk, it does not mean that you are doing anything wrong. Always take your time, read and re-read your return before signing and sending and make sure that your documentation is clear, precise and accurate.
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