With the tax season underway perhaps a few taxpayer tips from a former IRS agent, in no particular order, might be helpful to those preparing Form 1040 or meeting with an agent.
1. I often called on taxpayers who didn’t file a return due to lack of funds. That is a mistake. Late-filers are penalized 5 percent per month to a maximum of 25 percent. But if you file on time, even without a remittance, interest is calculated at 0.5 percent per month on the unpaid balance.
I had a case where a farmer went to his grave thinking he outsmarted the IRS. He had never filed a return and never paid any federal income taxes. Those omissions were discovered in the process of settling his estate. His farm was sold to pay delinquent taxes, penalties, and interest. His heirs received nothing.
2. You might draw extra attention if you prepare your own tax return, especially if you itemize deductions. Returns prepared by reputable firms are welcomed by the IRS as those companies are vigilant in protecting their reputations.
Professional preparers who commit to representing you if audited do not anticipate such a result and are careful to avoid that possibility. On the other hand, beware of those who “guarantee” a refund. There is no way a refund can be determined until a return is appropriately completed. The “guarantee” of a refund is only an advertising gimmick
3. Pay close attention to the documentary forms you receive disclosing income from employers, banks, investment firms, etc. Duplicates are submitted by those sources to the IRS. Any mismatches or omissions when filing your return are easily detected by IRS computers.
4. If all your income is subject to withholding taxes, you probably won’t hear from the IRS. Ninety percent of my cases involved self-employed taxpayers who itemized deductions.
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When a third party calculates or withholds taxes, be it an employer, a government agency, a reputable tax preparer, or a financial institution, there is no incentive to hedge in your favor. The IRS understands that might not be the case with individuals preparing their own returns.
5. If you are contacted by an IRS agent, your cooperation and consideration will be reciprocated. I confess taxpayers who were hostile with me drew extra attention, and sometimes with unhappy consequences. I once seized a service station after repeated visits with an abusive, antagonistic owner. The day after our confrontation, he paid his taxes in full and his business was returned to him. As is often the case, if he had cooperated at the outset, he could have saved himself considerable grief.
6. Taxpayers who have no records, or claim so, sometimes think the IRS will have no basis for assessing taxes. Wrong. In such instances, agents estimate income based on the values of property, such as houses and automobiles, or lifestyle, like vacationing in Tahiti.
I made such estimates on the high side to force the issue. Documentation would then mysteriously surface, the tax burden was reduced, and the case closed. But this process causes anguish to the taxpayer and absorbs an agent’s time. Both could be eliminated with accurate records produced at the outset.
7. If audited, have a clear, accurate record of your income and deductions. Agents have audited many returns and have a good idea of reasonable amounts. Figures, like $30,000 spent on advertising for a business that nets $60,000, will draw the attention of an agent and require full justification. However, if $1,000 for advertising were deducted, that figure might not draw a second glance. Time is money to the IRS. Agents will not waste time on what is trivial and are quick to accept what is reasonable.
8. Add a smile and a ready response when audited and matters will move along quickly. Don’t make an agent dig deeply into your case. He might find something you didn’t anticipate.
9. Delinquent taxpayers sometimes asked me, “Am I going to jail.”
“No, we do not have debtor prisons,” I would respond.
However, people guilty of tax fraud or assaulting an agent can end up in prison. An example of the former is the case of the infamous mobster, Al Capone. The Chicago gangster managed to escape prison for many serious crimes, including murder, but not fraudulent tax evasion. He spent eight years in prison for avoiding federal income taxes.
I was connected with an assault case, but, fortunately, not directly. I replaced an agent, Claire Whisler, at the IRS field office in Emporia, Kansas, after he suffered a blow to the head with a tire iron wielded by an irate taxpayer. Claire lost his hearing as a result and retired early. His assailant spent the next five years in a federal penitentiary.
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I once had a frightful experience when calling on a Kansas farmer working with a pitchfork behind a barn.
“What would they do if I stuck you with this?” he barked.
Caught off guard, I gulped, “I don’t think that’s a good idea.”
The farmer smiled and gave me a check. I didn’t find his intended joke amusing but let the matter drop.
The IRS is alert to such cases and advises agents to report any threat or assault immediately. The ensuing publicity is considered a good public lesson and, hopefully, protective of agents. In more severe cases, arrests are made.
A fellow agent in Great Bend, Kansas, laughingly told me of an irate taxpayer taking a swing at him, landing only a slight, glancing blow to his chin. When he mentioned the incident to his supervisor, IRS special investigators arrested the man. The assailant spent a year in a federal prison.
10. An inscription on the exterior of the Internal Revenue Service headquarters in Washington, D.C., reads “Taxes are what we pay for a civilized society.” Those words are borrowed from an opinion written by Supreme Court Justice Oliver Wendell Holmes in 1927. They are worth remembering as we once again move toward an April 15 date with the IRS.
Carroll McKibbin is a native Iowan who lives in San Luis Obispo, Calif., as a retired Cal Poly dean.