One thing that’s certain to spark fear in a typical American is unexpected contact from the Internal Revenue Service (IRS). This is an agency we collectively love to hate, and an agency we fear. We assign it a power and level of control over our lives it doesn’t really have. And while many people have horror stories to share, surprisingly few people seem to have had actual horrible experiences. Here, as is often the case, knowledge is the antidote.
Dealing With the IRS: No Real Surprises
The IRS initially addresses nearly all tax problems by mail. No one just shows up at your door demanding money — at least not until a variety of avenues have been exhausted. If the IRS does show up looking for money, you've likely had ample opportunity to address the problem before it got here. But beware of scams — this is now a big problem.
Scam artists know people fear the IRS, and they prey on this fear. These scammers may try to get money from you, from others who know you (such as your family), and even from your employer.
There are several ways to spot an IRS scam. The IRS doesn’t demand you make a payment in a specific fashion, such as via gift card or wire transfer. It also doesn’t threaten or intimidate people to try to collect owed taxes. If you owe taxes, you’ll know long before anyone starts insisting on payment. If you get a surprise email or phone call demanding payment for a tax problem you were unaware of, it’s very likely a scam.
There are many types of IRS scams. It’s impossible to know or prepare for all of them. But expect to be treated professionally by IRS employees. Expect you will not be threatened or intimidated. Expect that if you are contacted in person, it is for a situation you are already aware of and that the agent will have proper identification. Anything less is a good indication of a possible scam. You should report attempted scams to the Treasury Inspector General for Tax Administration.
Burden of Proof
When trying to resolve tax problems, you have the burden of proof to substantiate the numbers on your tax return. You’re required to have appropriate documentation. This is an area where people can easily get into trouble when dealing with the IRS. They think the IRS has to prove that the numbers are wrong, but that isn’t generally true. You need to prove your claims.
This seems contrary to legal proceedings as we know them in the U.S. Generally, the government, via prosecutors, is trying to prove someone did something that shouldn’t have been done. In court, there are some cases in which you can shift the burden to the IRS, but those are pretty limited.
The area in which the IRS generally has the burden of proof is for tax fraud. This happens when people purposefully lie on their taxes. Paying the minimum is absolutely legal. It’s called tax avoidance and seems to be a time-honored American tradition.
However, it’s illegal to lie or falsify information in order to pay less than the minimum. This is tax evasion, which is quite different from avoidance. Tax evasion is illegal. Don’t do it. It isn’t worth it.
How to Fix Tax Problems Once You Receive a Notice
The IRS is constantly contacting taxpayers to apprise them of mistakes on their tax returns, to question the provided information, or to seek additional information. Don’t panic: This is routine.
The IRS will tell you quite clearly what it's seeking or questioning. The most common tax return errors include things like missing or incorrect Social Security numbers, incorrect name spelling — i.e. spelling that doesn’t match with the Social Security number — or incorrect filing status.
Many of these tax problems are easy to fix. The IRS is looking for missing information. You provide it, and all is well.
But let’s say this is for something bigger. Let’s say the IRS is notifying you of a significant problem with your return — one involving a good deal of money. And while you’re a completely honest person (as most taxpayers are), you aren’t completely clear on how you came up with what you did. Oops. Now you need outside help.
Seek Outside Help
Tax law is very complex. We, the taxpayers, are expected to comply with something that takes more time than a full-time job to understand completely. It isn’t uncommon to find yourself over your head with an even mildly complex situation. Outside help is extremely important.
Tax professionals not only have the appropriate knowledge of tax laws to present things properly to the IRS, but they also take you out of the communication loop.
Big tax problems are legal matters, and what people say matters very much. Outside help is important not only to handle the tax problem, but also to help avoid problems that arise when individuals try to explain things to each other. You can talk yourself into bigger problems than you will ever talk yourself out of.
Sometimes you’ve done everything right and there still seems to be a problem. You may have made an agreement with someone at the IRS, but someone else won’t stop trying to collect from you.
There is a myriad of different tax problems for which you’re in the right and need someone on your side.
That someone is a taxpayer advocate. The Taxpayer Advocate Service is a department within the IRS and is funded by the IRS, but it represents you, the taxpayer. Advocates are free to use. I've used the service before. Long time ago, long story. But suffice it to say that one call to a taxpayer advocate ended inappropriate IRS collection efforts.
I can’t guarantee you’ll always get those results. But the taxpayer advocates are there to make sure you understand your rights and that the IRS doesn’t violate them.
What If You Discover You Made a Mistake?
Sometimes you find your own tax mistake. There might be a temptation to hide it if it’s in your favor. That’s probably a bad idea. Tempting nonetheless, but still a bad idea. Or the mistake could mean that you'll owe a little more. For example, you find a 1099 you didn’t include.
There’s a simple solution for these types of tax problems. You can file an amended return up to three years after the mistake. It’s quite easy. You complete form 1040X and send it off with any required payment. The IRS will let you know if you owe penalty and interest. If this happens to you, don’t worry. Mistakes get made. That’s why there’s a mechanism to fix them!
What If You Get Audited?
The principles are the same if you get audited. You need to be completely honest. If it’s anything bigger than a simple line-item audit, you should probably consider enlisting outside help. That said, the percentage of people who go through a full audit is quite small.
The average taxpayer is highly unlikely to ever go through a full audit. Honestly, it’s not worth the IRS’s time. It can’t spend days and days trying to find tens or hundreds of dollars. That wouldn’t be a good use of IRS resources.
But if you’re a small-business owner or high-income earner, or if you have a more complex tax situation, your likelihood of an audit goes up. It remains small, but there is more potential for it to be worth the IRS’s time.
The Bottom Line on How to Fix Tax Problems
In short, the IRS is nothing to fear. Its agents won’t come into your house at night and drag you off to jail if they think you owe a few hundred bucks. They generally give you a nice heads-up in the mail if they have any concerns, and you have plenty of time to keep those concerns from becoming real tax problems. Take care of small issues before they escalate into bigger ones.
If you lie and cheat on your taxes, that’s a different story. Just don’t do that. Legal tax avoidance is fine. Tax evasion is illegal — and it’s stealing from your fellow taxpayers. Nobody likes that.
You have resources to draw from if the IRS seems to be overstepping its bounds. The Taxpayer Advocate Service is there to help. If the situation warrants it, you can also try calling your representative in Congress or any other avenue you feel is appropriate. But if the IRS only wants a little bit of money, it might be better to just put the issue behind you. Fight when you’re right, but only then.