What the IRS Doesn't Want You to Know: A CPA Reveals the Tricks of the Trade

Welcome to the year 2000. The World Wide Web. Cell phones. E-mail. Eight point four gigabyte hard drives. Genetic engineering. Cloning. Viagra. Capabilities unheard of even one year ago abound.

There’s a new IRS commissioner, and a fresh, spiffy vision for reorganizing the IRS has been set in motion. But when it comes to paying taxes and dealing with the IRS, what really has changed thus far?

Each year hundreds of reputable books are written about taxes, audits, and the Internal Revenue Service (IRS). No-nonsense, definitive, and powerful, the titles practically scream out ways that we can deal with the IRS: Fight, Win, Battle, Negotiate. Words such as The Only or The Best followed by Audit, Tax Forms, Small Business, or Corporate Tax Guide Book You’ll Ever Need appear more than enough to guarantee results. Worried about the IRS, or in doubt about your personal tax situation? The confidence and warm cozy feelings titles such as these bring give a clear and unmistakable message to the taxpaying public: “Buy me,” these books say, “and all of your tax problems will be resolved.” So each year thousands buy these books, or select them off library shelves, hoping to discover the secret to keeping their tax payments low and their returns away from the scrutiny of the IRS.

Unfortunately, the information taxpayers really need to satisfy these goals rarely, if ever, surfaces. No matter how much information taxpayers read, hear, or research on the subject, they still remain easy targets for the IRS. In the IRS ballpark, despite living in a megatechnology environment, and with periodic promises about a more consumer-oriented IRS, some things have changed, but very little.

Isn’t anyone aware of the self-generating scam that keeps taxpayers in semidarkness and the IRS operating the way it always has? There is a very specific group of people who are aware. They just aren’t talking.

The time has come to deal with some clear-cut, shocking truths about what’s behind the unsettling phenomenon that perpetually keeps blinders on the taxpaying public. This requires exploring the overall phenomenon, and then examining why those in the know have remained silent.

First the scam. Let’s face facts: the IRS has a reputation for being all-knowing, all-powerful, and ruthless (many would say vicious). It is seen to have extensive manpower and technological resources, and the law is on its side. Without actually knowing what the IRS is and how the organization really works-or, perhaps more important, how it doesn’t work-the public remains in the no-holds-barred grip of the IRS’s reputation as the Big Bad Wolf.

Millions of taxpayers live with the fear that one day an IRS agent will single out an item from their tax return, decide an audit is in order, and come after them. Fingering alleged cheaters and exacting retribution is, after all, the acknowledgment IRS agents crave. In fact, the IRS is often referred to as an agency out of control-and with good reason. Once it selects its culprits, it chooses the punishment and proceeds to administer it with very little containment from any other governmental or nongovernmental agencies. So it’s really not surprising that most taxpayers envision the IRS as harassing and abusive, using its power in an uncaring, even brutal way to possibly destroy their careers and families.

Taxpayers are consistently so fearful of dealing with the IRS that they rank it as an event as traumatic as divorce or having their house burn down. This paranoia shows how enormously successful the IRS has been in creating its all-powerful-and-untouchable image. By sustaining these fears, the IRS maintains a status quo that actually prevents taxpayers from

*        Questioning how much of the IRS’s reputation is actually true.

*        Considering why a never-ending body of information, designed by well-meaning authors and “tax experts” to help them pay less in taxes and better manage the demands of the IRS, never genuinely helps them accomplish those goals.
Now let’s talk about those who know exactly what is going on and find out why they aren’t talking. Any good Certified Public Accountant (CPA) or tax professional knows how to beat the IRS at its own game. But an unwritten law among tax professionals has traditionally prevented this vital information from being revealed publicly.

What is this law based on? It’s based on tax professionals’ healthy fear that the IRS will turn against them.

When filling out their clients’ tax returns, tax professionals use information they have gained as experts in their field. But these very same professionals do not traditionally disclose, in anything resembling a public forum, information in three crucial areas that can make a huge difference in the lives of the millions of taxpayers who aren’t their clients:

1. What the IRS really is and how it thinks, responds, and operates, or, more precisely, doesn’t operate.

2. Endless loopholes in our tax laws that can be used in the preparation of an individual tax return.

3. How both of these can be used consistently to benefit taxpayers.

Tax professionals have made it a practice NOT to reveal such information-and with good reason: They’ve seen firsthand how people can be destroyed by both warranted and unwarranted IRS attacks. Why would CPAs, or any professionals in the tax field, put their lives, families, careers, and futures on the line? The answer to this question has traditionally prevented tax professionals from publicly explaining why the right kind of information never gets to the taxpaying public. It also keeps them from revealing that information on a broad scale.

So, to prevent an all-out personal conflagration and probably endless repercussions, tax professionals continue to offer whitewashed material that promises to tell taxpayers how they can disappear from the IRS’s view. In fact, much of this information is correct and does work. But it is not the whole story. Too much information is left out, and no one knows this better than the authors themselves.

After almost 34 years as a CPA, I have consistently watched how the IRS can financially ruin all kinds of people: rich, middle-class, the average working family-people exactly like you.

In mid-1997 a fascinating case involving IRS wrongdoing hit the newspapers. It had begun simply enough in 1993.

Mrs. Carole Word accompanied her son to an audit of their family business, three children’s clothing stores in Colorado Springs. Because the audit was going poorly, Mrs. Ward spoke up to the female IRS revenue agent, saying, “Honey, from what I can see of your accounting skills, the country would be better served if you were dishing up chicken-fried steak on the interstate in West Texas, with all that clunky jewelry and big hair.”

Four weeks later, IRS revenue agents raided the family’s stores, padlocked all three of them, and posted notices in the windows that implied that Mrs. Ward, who was 49, was a drug smuggler. The IRS then imposed a tax bill in the amount of $324,000.

Mrs. Ward hired two attorneys and sought press coverage to publicize her plight. The IRS countered with a publicity campaign that included sending a letter to the editor of the local newspaper giving details of Ward’s case and providing a fact sheet about it to the TV show Inside Edition.

Three months after the raid, the government settled the tax dispute for $3,485, but a week later the IRS district director appeared on a radio show detailing the IRS’s position against Ward but failing to mention that the bill had already been settled for little more than 1 percent of the original amount.

At this point, Ward sued the IRS for disclosing confidential information from her tax return. Until the case was brought to trial, Ward’s daughter had to quit high school because the IRS statements led students to believe the family was engaged in drug smuggling. The family went from having no debts at the time of the raid to owing $75,000. The lease on one of the stores was lost. And only two thirds of the goods and equipment seized in the raid were returned, much of that badly damaged.

During the nine-day trial the IRS and the Justice Department, which defended the lawsuit, denied any wrongdoing. In a harshly worded 17-page opinion, Judge William Downes of the federal district court in Denver found that one of the IRS agents had been “grossly negligent,” had acted with “reckless disregard” for the law, and had made three false statements in a sworn declaration. The judge awarded Mrs. Ward $4,000 in damages for improper disclosures, $75,000 in damages for the emotional distress the IRS caused her to suffer, and $250,000 in punitive damages, giving “notice to the IRS that reprehensible abuse of authority by one of its employees cannot and will not be tolerated.” The judge also criticized the IRS district director who had made the radio appearance.

“I never should have spoken condescendingly,” Ward later said, “but what they did to me for mouthing off was criminal.”

Never forget-the amount awarded by the judge, and the fact that such a case was settled in the taxpayer’s favor, comes because of almost 20 years of private citizens fighting for retribution in thousands of similar cases but receiving nothing except bureaucratic doors slammed in their faces. The government and the Justice Department have just begun to accept some limit, if only slight, upon the unbridled power of the IRS over the rights of taxpayers.

Here’s another case that demonstrates the blatant and unmitigated arrogance of the IRS.

A high-level executive in a nationally known insurance company was the subject of an extensive IRS investigation. Allegedly he owed $3,500. The taxpayer agreed to admit to tax evasion, and the IRS promised, in a written agreement…