FEAR-OF-THE-IRS is one of the big reasons why entrepreneurs unnecessarily fork out way too much in taxes. Well, eradicate the fear because you have rights against the IRS. IRS employees can lose their jobs because of ten possible offenses, including a violation of constitutional or civil rights of taxpayers. You can sue the IRS for up to $100,000 of damages caused by an IRS employee who negligently disregards the tax law and up to a $1,000,000 if an IRS employee willfully violates the tax law.
Also, IRS "hidden weaknesses" can help you. For example, in an audit, you have a much better chance on winning by going to appeals. Statistics show that the average results on appeal are a 40% reduction in taxes. But only one out of 16 audited taxpayers goes to Appeals. (This is because taxpayers or their tax preparers are afraid to do so, or many tax preparers do not know how to do the Appeals process. ) The Appeals (or "Appellate") level of the IRS is not a court, but an informal hearing with an "Appeals Officer", who has a different job than auditors at the examination level. Their job is to settle cases and avoid the "hazards of litigation", such as the cost of going to court and the IRS losing. (You do not need an attorney to represent you before Appeals, although you should use a competent tax specialist who could be a CPA or a tax attorney.)
Knowing your appeals rights from the outset of an audit can give you more confidence and strengthen your position throughout the audit. IRS auditors are evaluated by how many cases they close. They therefore do not want your case to go to Appeals. Just, by saying. "OK if you’re going to play hardball, I got hard bats. I don’t even want to waste my time to talk to your manager. Stop now as I will settle this in Appeals." This will have a real impact on the auditor. They would realize that you know the rules, you are not playing games and are not easily intimidated.
Even better, knowing your rights from the outset and knowing how the system works, can have an impact on your taxes before you are ever audited (if you are ever audited). For instance, if you discreetly take aggressive positions on gray* areas, you know that you have a good chance of winning by going to Appeals, or by stating that you will go to Appeals, with the good possibility that the IRS auditor will back off, as per the above. Plus, even better, there are audit-proofing techniques (discussed in other articles) that you can employ so you do not get audited in the first place. But if you are audited, you have an ace in the hole – Appeals.
Al Aiello is a national speaker specializing in Wealth Protection teaching dynamic strategies on tax reduction, IRS audit-proofing, entity structuring and asset protection targeted for real estate investors and business owners. Al Aiello is a regular guest speaker at CT REIA. Go here for the current list of upcoming real estate investing seminars in Connecticut.