Congratulations to all American taxpayers for surviving yet another three and a half months of panic - tax season. There's nothing quite like the time of year when we nervously bite our nails waiting to find out if we owe Uncle Sam more money than we made in the prior year. There's also no feeling quite like the one we get upon hearing we have a refund coming or at least we owe less than we thought we would.
Some of us take this whole income tax filing thing in stride, reasoning that we've made provisions through the year for the taxes we owe. Others live in abject terror of the "tax man" expecting nothing less than being thrown in jail for the slightest mistake. Whatever category you fall into, the truth is, we all have something to fear when it comes to dealing with the Internal Revenue Service. After all, in many instances, the IRS is effectively the maker of the law, the enforcer of the law and the judge of the law - sometimes without sufficient oversight.
A couple of true stories:
Take the case of the man who had a small consulting practice to supplement his retirement income. He was forthcoming with all of the income he earned, but when asked about expenses, he simply said he would rather pay more tax than risk the IRS auditing him and finding an error. The truth is, he paid several thousand dollars in tax unnecessarily, rather than the few hundred he really owed.
Then there's the elderly lady who worried herself sick about taxes. Unfortunately, the years had taken their toll on her memory, except that she knew her tax return was due on April 15. Because of her memory lapses, she had lost much of the information needed to file her return and time was required to get copies. Ultimately, she had a big refund coming to her, but she spent over a quarter of her year worrying about the IRS carting her off to jail.
Taxpayers have truly had a great deal to worry about, but the tide has turned somewhat. With the enactment of "The Internal Revenue Service Restructuring and Reform Act of 1998", taxpayers were accorded rights that would require the Internal Revenue Service to seriously consider it's options prior to taking heavy-handed measures.
What do you mean I have to prove it to you?
Before the enactment of the "Taxpayer Bill of Rights 3" ("TBR"), tax law was the only realm in American jurisprudence where you were guilty until proven innocent. Whereas in criminal cases, a defendant must be proven guilty with credible evidence, the IRS really didn't have to prove anything. It was the taxpayer's burden to prove a deduction was proper, not the IRS'.
With the enactment of the TBR, under certain circumstances, the IRS became the party that was required to prove guilt. The act says that if the taxpayer produces "credible evidence" supporting their claim in a court proceeding, it becomes the IRS' duty to refute the evidence, not the other way around. Of course, you must comply with all of the substantiation rules of the Internal Revenue Code, but this change in law was a major shift in government policy.
Time to Pay the Piper, Guys!
Prior to the TBR, reasonable attorney fees were set at $110 per hour. The TBR increased this amount to $125 per hour and, if the issues involved were unusually complex, or local expertise was not available, the courts gained the authority to award even higher fees. In fact, the courts could even award fees in excess of those actually billed where the fees originally charged by the attorney were lower than the assumed reasonable rates.
The IRS now can be held liable for economic damages sustained as a result of IRS negligence or intentional disregard of the taxpayer's rights. If there is found to be an intentional disregard for taxpayer rights, the liability of the IRS can be as great as $1 million ($100,000 in the case of negligence). This can serve as a great deterrent when trying to strong-arm a taxpayer.
I'm innocent - I swear it!
One of the things strengthened and streamlined by the TBR was the innocent spouse relief provisions. We've seen plenty of times in our practice where the taxpayer just takes the return from us, signs it and puts it in the mail - never looking to see if the numbers are correct.
If our clients place that much faith in us, how much more faith do they place in the spouses they have promised to love and honor? Unfortunately, some spouses aren't all that trustworthy. When that happens, the TBR provides a mechanism to help truly innocent spouses avoid liability for the guilty spouse's actions. This was a great improvement over prior law. For further information, you can go to the IRS website and use the Spousal Tax Relief Eligibility Explorer.
There are always exceptions - aren't there?
If you are due a refund, generally, you must file for the refund within three years of the due date of your return or within two years of when the tax was paid. However, there are circumstances where taxpayers are unable to manage their financial affairs. In this instance, the TBR has made provision to suspend the running of these limitations.
If a person is determined incapable of handling their financial affairs due to a mental or physical disability that can expected to result in death or last longer than 12 months (and they have no guardian), then they can be considered "financially disabled." If this is the case, then the time period for filing refund claims is suspended.
To illustrate, let's assume, while sitting at a red light, you realize that a mistake was made by your tax preparer on your return two years ago. The light turns green and you take off. Unfortunately, a truck takes the opportunity to run the red light and plows into you. When you wake up three years later, do you still have the chance at recovering your money? Thanks to this provision, you do.
You have the right to....
To it's credit, the Internal Revenue Service has taken to heart much of the criticism regarding it's past abuses and does a good job of informing taxpayers of their rights. Publication 1, Your Rights As a Taxpayer
, gives a broad overview of your rights in dealing with the IRS. Among these rights are the right to courteous and fair treatment, privacy and confidentiality, appropriate representation in any IRS matters, access to the Taxpayer Advocate Service and various appeal and judicial review rights.
If you are already in the midst of a controversy with the IRS, several other publications may be useful. Publication 556, Examination of Returns, Appeal Rights, and Claims for Refunds
, will give you insight into your options if you wish to disagree with an agent's findings. One word of advice - follow the appeals procedure exactly
if you wish to protect all of your rights.
A companion to Publication 556 is Publication 594, The IRS Collection Process
. This publication tells you what to do when you owe taxes and the IRS's options when it comes to enforcing tax collections.
The inevitable conclusion.,
Although the IRS still has great power to administer the nation's tax law, it does have rules that must be followed, or it too can face stiff penalties. Fortunately, the collection procedures are clearly outlined in various publications and the statutes themselves.
If you are presently involved at any level of the process with the IRS, take a look at the publications previously cited. Once you have done this, you will see the process can be quite complicated. The good news is we can honestly say "Been there, done that and bought the t-shirt," so give us a call and let's discuss your needs. After all, that's our business - to help you even if you are David to the IRS' Goliath.
Until next month, have a great month and happy Mother's Day to all you mothers out there.