The IRS makes mistakes all the time. Sometimes it is impossible to find a bureaucrat at the IRS to fix the problem. When this happens, you go to court; Tax Court.
Beating the IRS in Tax Court is not a daunting task. You can file a small claims case if you owe less than $50,000. Small claims in Tax Court is similar to small claims in civil court. You can present your case to the judge in an informal environment; no fancy legal talk and maneuvers.
Another benefit of Tax Court is that once you file, the IRS attorneys work hard to get you to settle out of court. They can cut you some very nice deals, even more than you deserve, to keep the Tax Court docket open.
Learn more about winning in Tax Court here: The IRS Audit Manual: Beating the IRS in Tax Court
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Tuesday, May 25, 2010
IRS Offer in Compromise Secrets
You see the ads on TV claiming to settle your tax liability for pennies on the dollar. These advertisements are half truths. You can settle in full with the IRS for less than you owe. But you need to know the IRS formula.
Before you even call for help, see in advance what the IRS will accept. The article linked below has a good description of the formula.
Once you know if an Offer in Compromise is for you, you will need to gather all your personal income, expenses, and loans.
This article has a good run down of what to expect and tricks to settle for the absolute minimum with the IRS: The IRS Audit Manual: Secrets to the IRS Offer in Compromise
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Before you even call for help, see in advance what the IRS will accept. The article linked below has a good description of the formula.
Once you know if an Offer in Compromise is for you, you will need to gather all your personal income, expenses, and loans.
This article has a good run down of what to expect and tricks to settle for the absolute minimum with the IRS: The IRS Audit Manual: Secrets to the IRS Offer in Compromise
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The IRS Installment Agreement
There are options available when you owe the IRS. The installment agreement is the best first line of defense and probably all you will need to get your tax issues behind you.
The IRS must stop all collection actions against you once they accept your installment agreement. In many cases, the IRS is required to automatically accept your installment request.
Do not give the IRS the opportunity to levy your bank account or garnish your paycheck. Use this powerful tool to your advantage.
For a full review of the IRS Installment Agreement, click here: The IRS Audit Manual: The Installment Agreement and Other Payment Options
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The IRS must stop all collection actions against you once they accept your installment agreement. In many cases, the IRS is required to automatically accept your installment request.
Do not give the IRS the opportunity to levy your bank account or garnish your paycheck. Use this powerful tool to your advantage.
For a full review of the IRS Installment Agreement, click here: The IRS Audit Manual: The Installment Agreement and Other Payment Options
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Preparing for an IRS Audit
Old accountants say, "You win an IRS audit before you ever meet the auditor." And it is true. Your preparation work for the audit determines the tone of the audit and the outcome in most cases.
Gathering your information in advance and adding receipts together shows you where you stand. Weaknesses in your records are now clear to you, but not to the auditor. You can guide to a limited extent where the auditor looks.
Addressing lost documents up front can work to your advantage. If the auditor discovers something while working through your papers, you can have serious problems.
Never throw a stack of paper at the IRS auditor. Have everything gathered together in paper clipped piles. This way you only provide the information you want or the IRS requested. Why give the IRS extra information to use against you.
Read more about preparing for an audit here: The IRS Tax Audit Process: Preparing for the Audit
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Gathering your information in advance and adding receipts together shows you where you stand. Weaknesses in your records are now clear to you, but not to the auditor. You can guide to a limited extent where the auditor looks.
Addressing lost documents up front can work to your advantage. If the auditor discovers something while working through your papers, you can have serious problems.
Never throw a stack of paper at the IRS auditor. Have everything gathered together in paper clipped piles. This way you only provide the information you want or the IRS requested. Why give the IRS extra information to use against you.
Read more about preparing for an audit here: The IRS Tax Audit Process: Preparing for the Audit
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Appeal an IRS Tax Assessment
The IRS gets it wrong half of the time. In fact, over 80% of tax assessments resulting from an audit and sent to appeals are reduced or illuminated in appeals.
You need to understand the IRS audit process before you can understand why most tax assessments need to get appealed. The IRS auditor will only add up receipts and compare reported information on the tax return with records the IRS already has. There are frequent errors.
The IRS auditor will assess additional tax when something does not match or if receipts for deductions are missing. The auditor has no authority to use common sense in these issues. They add numbers and decide if tax laws were followed.
The IRS appeals office has the authority to settle the dispute. It is in the IRS' best interests to settle the issues rather than risk the issue ending up in Tax Court, which is already overbooked. The IRS appeals office will frequently reduce even questionable issues from an audit all in the hope of gets the file closed. Use this information to your advantage.
IRS appeals is a large issue. You can read the following two articles to get an in-depth look at the IRS appeals process: IRS Audit Manual: The IRS Appeal and The IRS Audit Manual Appeals Process, Part 2
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You need to understand the IRS audit process before you can understand why most tax assessments need to get appealed. The IRS auditor will only add up receipts and compare reported information on the tax return with records the IRS already has. There are frequent errors.
The IRS auditor will assess additional tax when something does not match or if receipts for deductions are missing. The auditor has no authority to use common sense in these issues. They add numbers and decide if tax laws were followed.
The IRS appeals office has the authority to settle the dispute. It is in the IRS' best interests to settle the issues rather than risk the issue ending up in Tax Court, which is already overbooked. The IRS appeals office will frequently reduce even questionable issues from an audit all in the hope of gets the file closed. Use this information to your advantage.
IRS appeals is a large issue. You can read the following two articles to get an in-depth look at the IRS appeals process: IRS Audit Manual: The IRS Appeal and The IRS Audit Manual Appeals Process, Part 2
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Abatement of IRS Penalties and Interest
Taxes are bad enough. Personal matters in life can get you behind in your taxes and it is nigh impossible to catch up. The IRS has a program to get your life back without pages and pages of forms to fill out. Today I am going to talk about abatement of IRS penalties and interest.
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- Abatement of IRS Penalties: It is easier to get the IRS to abate a penalty than interest. File Form 843 to request abatement. Keep your explanation short and to the point. The biggest drawback is that you need to pay the IRS in full for the tax period you are requesting abatement. If you owe on several years of taxes, file for abatement as soon as each year is paid.
- Abatement of IRS Interest: The IRS allows for abatement of interest for two reasons only: the IRS gave you bad written advice or the IRS delayed an audit unnecessarily causing more interest to accrue.
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The IRS Audit First Meeting
Preparing for your first meeting with an IRS auditor is the difference between winning and losing. Gather all your bank statements and receipts. Add them together before meeting the auditor. This way you will know in advance if there are any missing documents issues.
The IRS auditor has the right to see your home and/or business at least once. Do not become alarmed when they ask. They ask everyone. The auditor has already driven past your home and business before you even got your IRS audit letter.
The first meeting begins with disclosure of your rights and Q&A. The Q&A is to help the auditor understand your personal and business situation better. Answer questions truthfully. If you do not know an answer, say so. Do not guess. It will come back to bite you later.
After the Q&A the auditor sits down and begins working through your paperwork. Never let the auditor take your original documents with her. They can have photocopies or they can come back later. If the IRS looses your paperwork, you suffer the consequences. Therefore, you keep your original documents at all times.
Learn more about the IRS audit first meeting here: The IRS Tax Audit Process: The First Meeting
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The IRS auditor has the right to see your home and/or business at least once. Do not become alarmed when they ask. They ask everyone. The auditor has already driven past your home and business before you even got your IRS audit letter.
The first meeting begins with disclosure of your rights and Q&A. The Q&A is to help the auditor understand your personal and business situation better. Answer questions truthfully. If you do not know an answer, say so. Do not guess. It will come back to bite you later.
After the Q&A the auditor sits down and begins working through your paperwork. Never let the auditor take your original documents with her. They can have photocopies or they can come back later. If the IRS looses your paperwork, you suffer the consequences. Therefore, you keep your original documents at all times.
Learn more about the IRS audit first meeting here: The IRS Tax Audit Process: The First Meeting
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IRS Audit Procedures
An IRS audit is not an accusation; it is an opportunity to verify your numbers. I make it sound so nice, don't I?
Most people do not understand how the IRS approaches a tax return for audit. The average taxpayer thinks the IRS auditor is looking for cheating and it is one thing the auditor will look for. However, the auditor is looking to verify the numbers on your tax return more than anything else. She will add up all your receipts and compare it to your deductions plus compare income to bank deposits and W-2s and 1099s the IRS has on file.
The IRS auditor will also verify that you applied tax law correctly on your return. A gift to your buddy is not a charitable tax deduction and will be disallowed if claimed. Each area of the tax return will face the similar scrutiny.
An audit is nothing to fear. It is more annoyance than anything. You can learn more by reading this article: IRS Audit Manual: IRS Audit Procedures
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Most people do not understand how the IRS approaches a tax return for audit. The average taxpayer thinks the IRS auditor is looking for cheating and it is one thing the auditor will look for. However, the auditor is looking to verify the numbers on your tax return more than anything else. She will add up all your receipts and compare it to your deductions plus compare income to bank deposits and W-2s and 1099s the IRS has on file.
The IRS auditor will also verify that you applied tax law correctly on your return. A gift to your buddy is not a charitable tax deduction and will be disallowed if claimed. Each area of the tax return will face the similar scrutiny.
An audit is nothing to fear. It is more annoyance than anything. You can learn more by reading this article: IRS Audit Manual: IRS Audit Procedures
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How the IRS Selects Audits
There no fool-proof way to avoid an IRS audit, but you can reduce the risk if you follow a few simple rules.
If you have a small business, consider organizing as a partnership or S corporation. This can cut your audit risk by over 75%.
To learn more about the IRS audit selection process, click here: IRS Tax Audits: The Selection Process
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- Errors: The number one reason the IRS audits a tax return is errors on the return. There are two errors you must avoid: math and matching.
- Math Errors: Math errors are going the way of the dinosaur due to the heavy use of computer software to prepare tax returns.
- Matching Errors: Matching errors are on the rise, however. A matching error is where the IRS has different information than you reported on the tax return. Missed interest and dividend income top the list. Missed sales of stocks and mutual funds run a close second. In my office I saw a tax return audited due to missed mortgage interest. The IRS assumed if the taxpayer was so sloppy as to miss deductions, there could be unreported income to.
If you have a small business, consider organizing as a partnership or S corporation. This can cut your audit risk by over 75%.
To learn more about the IRS audit selection process, click here: IRS Tax Audits: The Selection Process
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