The Top 2 Commandments To Handling Any IRS Tax Controversy
Yes, I realize there are already thousands of articles published on handling IRS controversies relating to a whole host of matters. Most focus on particular tax topics, such as how to handle an audit or representing oneself pro se in the U.S. Tax Court. So long as the information is accurate, then great, I hope you, the taxpayer, find whatever you are looking for.
One problem that I see, however, is that very few articles focus on the absolute fundamentals of dealing with any IRS controversy. And when I say “tax controversy,” let me just clarify by saying that for me the term “tax controversy” entails many things, but for purposes of this article, a “tax controversy” is when the IRS takes issue with one of your previously submitted tax returns or failure to file a tax return.
When dealing with the IRS, it is essential that you understand some very fundamental things. So essential, in fact, I refer to them as the 5 Commandments.
Commandment I: Do Not Ignore the IRS!
Seems simple enough, but even cynics would be surprised at the number of people who simply ignore the IRS in the hopes they will just lose interest and go away. Unfortunately, the IRS does not go away. As a matter of fact, it is quite the opposite. Failure to respond to IRS inquiries will eventually give the IRS the right to impose its will on you. That amount in controversy is no longer in controversy – it is now assessed and owed. Let me provide an example.
Example 1 – Taxpayer John purchased his first set of stock in the beginning of 2008. The total amount purchased was $10,000. John quickly realizes 2008 is a terrible year to start buying stocks so manages to sell all his stock by the end of 2008 for $8,000. As you can see, John lost $2,000 in this process. Now, let us say the IRS sends taxpayer John a letter stating that it disagrees with how John treated his capital gains with respect to the stocks bought and sold in 2008 and would like him to submit additional paperwork in order to substantiate his claims of the stock’s basis. Instead of responding, however, John ignores the letter from the IRS. In fact, John ignores all subsequent letters as well. As a result, the IRS disallows the $2,000 loss and instead assesses an $8,000 gain.
As you can see, this $10,000 swing will greatly affect his tax liability, and thus the amount he will owe to the IRS. But wait! What about John’s basis? Shouldn’t the IRS know John had to have some basis in the stock?
Yes, the IRS does know John has some basis in the stock, but the point to remember here is that the IRS is not responsible for determining the stock’s basis, John is responsible. When John does not respond to the IRS letters, the IRS is left with no choice but to treat the stock as if it had a basis of zero.
Trust me when I say this – if you try to work pro-actively with the IRS, you will be treated fairly. If you decide to ignore the IRS, they simply cannot give you the benefit of the doubt.
Commandment II: Do Not Panic
People make irrational decisions when panicked. My advice – remain calm. Personally, the IRS reminds me of a turtle. A turtle is smart, but slow. Garnishing wages and levying on property are actions of last resort and take a long time to come about. The IRS simply does not want to have to take your case that far. Also, the IRS rarely hands cases over to the Department of Justice in order to bring criminal charges against you. Honestly, the IRS does not think you are worth it, so do not give them a reason to make it worth their time. Remain calm and you will make good decisions.