It's Tax Season: How to Deal With IRS

By Eve Munsky

During tax season, my appointments are usually set up every hour on the hour. My staff isn’t as familiar with each client as I am and they don’t always know when to set aside extra time for someone with a complicated situation or a brief meeting for a basic return. Fortunately, it usually blends nicely and short appointments are peppered throughout the day so the extra time I need with some clients doesn’t totally upset the schedule.

This morning, however, I got totally out of sync. I had a few things to take care of before I even got to the office. Just when I was hoping the boiler repair man would be right on time and finish quickly, he was a few minutes late and he brought an assistant with him and they needed to do a lot of conferring. I wanted to get some of the checks that have been piling in my drawer to the bank so I could finally start enjoying the fruits of my labor. I was glad to see the bank line was a very short. I didn’t even try to walk really fast and cut in front of the elderly gentleman who finished writing his deposit slip a second before I did. With two tellers working and just the two of us on line, dodging in front of him hardly seemed worth destroying his impression of my whole generation. Unfortunately, a woman at the counter was having a difficult time understanding the young teller and the other, more experienced teller was called over to assist, leaving the line at a dead standstill. The voices in my head were debating leaving versus the “it should only be another minute or two” argument. The thought of having to cut my staff fat checks for the overtime they’ve been putting in caused the minute-or-two more voice to win that argument. Unfortunately, it turned into more like ten minutes and I still had one more stop.

I raced through the wholesale store next to my bank to get the two things we seem to be perpetually low on. I checked the clock ticking away at the front of the store. It would be tight but I thought I could still slide in just before my first client. I was in the express line with my box of much needed reams of paper (which we are running through at a blinding rate despite the prevalence of e-file) and a huge box of garbage bags when the cashier turned on her blinking light. An insistent customer wasn’t sure she was getting the full two and a half dollar discount on her box of chocolate chip cookies. I would have gladly given her five dollars just to get the line moving.

Needless to say, I was not only a few minutes late for my first client, but also sans coffee. The pile of papers she dumped on my desk would frighten even a heavily caffeinated accountant. It seems her life and business were totally changing directions. She had several changes of jobs – many, many W-2s, a re-financed mortgage and a renewed interest in the corporation she had told me was basically inactive. When my next client called to say she would be a few minutes late, as I was navigating the pile, I was relieved. When she strolled in an hour late, I could hardly be annoyed – though I admit I was – as I was still not finished with client number one. Strolling in behind her, came couple number three. I am not like the doctor who takes pleasure in a full waiting room. If more than one person is waiting, I stress.

Into that awful mode I go. I’m smiling and acting friendly but my brain is screaming, hurry, hurry and fighting with my better nature. When I finally I manage to sort out client number one, I am hoping for a quick and easy number two so I can get back to some semblance of schedule. It’s a crap shoot. She’s a new client, so all the basics need to be entered in the computer– not usually a good way to make up time, my brain is grumbling. Still, if it’s a simple one, it could work. She tells me she has a business – my brain begins hollering curses. She tells me she’s stressed. She is really bad at this stuff, and she needs to get out 1099s. Today is the deadline. I can barely hear myself think over the shouting of my brain. She’s stressed? I now have a side project before we even get to the actual return.

Somehow on autopilot, I give her my usual schpiel about corporate record keeping. I have cultivated it over time to remove all accountant-speak. She is nodding, my standard jokes get a couple of grins. She is giving me the, “finally, an accountant I can talk to” look. Normally, I live for those looks – but not when I am so incredibly behind schedule. She says she doesn’t think she has all her paperwork together and it has become apparent that there will be no return produced today, and I am about to nudge her toward my assistant’s desk to schedule another appointment when she sheepishly slides a piece of paper across my desk. In a nanosecond, I recognize the typeface, the layout. It’s one piece of paper guaranteed to ruin anyone’s day. I look at her, our eyes meet. My brain stops screaming. My nature wins. IRS Levy notices are not something to be put off for a less busy day.

My assistant is working with the young couple that came in behind her. He is beginning to organize their papers, plying them with these awesome chocolates we bought that look like 1040 forms. They seem fine, happy with their chocolate and his sense of humor. I leave them in his capable hands.

I ask her about the notice and any earlier correspondence. I could have written the script before she answered. She says that she was “audited” and that she got a bill. It’s a common misconception. An audit means you sit down opposite an IRS agent and produce cancelled checks and receipts. What she received was not an audit notice, but rather a note from IRS saying that someone reported that they paid her income that she did not claim on her return. This is called an under-reporting notice, or more technically a CP-2000 letter. In her case, it wound up being business income she didn’t report. I asked if she actually received the income and she said, “yes.” I asked if she reported it she said, “no.” I asked if she had expenses against this income and she said, “of course.”

I told her that she simply needed to inform IRS when she got the notice that she did receive the income but that there were expenses against it and that the best way to do this was by filing an amended return which added both the income and expenses to the amounts on her original filings. She said she had sent all the letters she received to her accountant. She assumed he was handling it, but to the best of her knowledge nothing had been filed. She didn’t remember being sent any new papers to sign.

When I told her that IRS would accept that she reasonably believed her accountant would take care of it and that they would still probably accept an amended filing, she was shocked. She honestly felt that IRS was a bully that would take her money because they could. I told her IRS didn’t care about taking her money, they only wanted to make sure she was in compliance and she was flabbergasted.

It is the truth.

Contrary to popular opinion, IRS is a fairly reasonable branch of government that generally accepts people’s word on things. Sometimes when someone submits something that looks questionable, or disagrees with information IRS received from other sources, they ask to see documentation. They only get unreasonable when they feel their questions are being ignored.

The basic process is that IRS receives information from all the different companies that pay income., like employers and banks. The forms you receive, i.e., W-2s, 1099s, are also sent to IRS. The data is all compiled by their computers and they compare what you report to what was reported about you. If there is a difference, it is generally checked by a human being. If they don’t see something the computer missed, a notice is generated. IRS isn’t mad at the person, they aren’t out to get them, they simply want to know if the income reported to them was correct.

The problem is that most people don’t know how to read these letters, much less answer them. First rule of thumb, as ridiculous as it sounds -- is not to rush into panic mode, rationally check it out. Even if you don’t make it through all the threatening mumbo jumbo (which it probably is best to ignore), you can clearly see the list of unreported income. Many of the letters they send out relate to easily resolved situations. There are common mistakes like reporting income on the wrong line that generate letters that simply require a response. The response can be as simple as “While I did receive this IRA distribution, it was rolled over into an account at another bank,” or “By accident, I reported my pension income on the line with my wages.” Sending a copy of the new IRA statement or an adding machine tape showing that the amount on line 7 includes these three W-2s and this one additional 1099 will stop any billing in a heartbeat.

There are numerous programs to help taxpayers that do get into jams. While you are always responsible for the taxes on your income and it is statutory that IRS collect interest from you if you are late paying the taxes, if you can show them that you tried to do the right thing but simply made a mistake, there is a good chance they will forgive the expensive penalties.

Second rule of thumb, cut to the chase and explain what happened. For example, “I read the instructions for this form and assumed this sentence to mean this income didn’t need to be reported. I fully intended to comply with tax laws.” IRS appreciates the attempt to comply.

For those in truly dire straits, IRS has an Offer In Compromise program. In that scenario, taxpayers can basically say to IRS, I know the bill is sky high, but this is all I have take it or leave it. If they’ve made a reasonable offer (actually offered a significant portion of what they have even if its small), IRS will generally take it.

When dealing with IRS remember one more thing. Congress makes the rules, not IRS. IRS attempts to enforce Congress’ very complicated set of rules that is often politically, not practically, determined. Most people at IRS are under-trained and under-paid. Many of the people who send out the scary, life-changing notices are moms who work at IRS because they offer decent benefits and flexible hours so they can get home before their kids are out of school. For the record, it is rare to find an IRS employee that doesn’t appreciate the friendly approach. Most are more than willing to be helpful when given the opportunity.

What is the moral of this story?

Number one: If you receive a notice from IRS saying there is an underpayment, check it out. IRS tax examiners are encouraged to finish a certain number of cases in an hour, not to be sure that they have looked after the better interest of the taxpayer. Number two: Answer the letter or be sure someone answers on your behalf even if its just to say you are checking into it and need more time (which is generally granted). If you have an usual situation, defend it. If it's reasonable, you could get a break. Third, contrary to popular opinion, IRS finding one mistake on your return will not prompt them to audit you for the next twenty years.

OK. Back to the salt mines for me.