With a lot of fanfare, we have a brand-new recently passed act that has some new tax law in it. That is the Inflation Reduction Act of 2022. One of the big changes that we’re hearing about is the new and improved (?) IRS. Lots more employees and lots more audits. Or at least that is the concern.
TL;DR: Skip to the bottom of this blog and see how I can help when you get one of these nasty IRS letters. I predict a lot of you are about to get one for the first time in your lives.
There are 87,000 auditors looking for you. They are only supposed to be looking for people who make over $400,000. I guess like most things these days, the IRS issues are highly politicized and depending on what source you listen to, you have nothing to worry about or you have lots to worry about.
Without the politics, we are going look at what is already happening with the IRS. And yes, they have been given marching orders. Rein in the tax cheats and start answering the phone! Plus open the mail.
What we know:
The IRS will be hiring up to 87,000 new employees. The job functions have not been specified in the Inflation Reduction Act (IRA) of 2022. Since 50,000 IRS employees are expected to retire over the next 10 years, there is a slight net gain. But realistically not much.
Treasury Secretary Janet Yellen has told the IRS they need to come up with a new plan within 6 months that will show how they will begin answering the phones, get the computer system updated and thoroughly integrated, process the millions of returns still outstanding, oh, and catch the tax cheats.
Honestly, I do not think that is too realistic when you consider how many people are leaving the IRS right now and while the new hires add some new workers, they are inexperienced and will need to be trained. .
Pay is low for IRS workers compared to the marketplace for experienced accountants with accounting or business degrees. It is unlikely they will have people beating down the door to go to work for them.
But what the IRS can do is send letters.
Here are some of the real-life cases that we have seen recently.
- A C Corporation’s 2020 return is under audit. The initial letter listed two expense items from their Form 1120 that the IRS wanted info on. The funny thing is that those expense items were tied directly to Amazon reports. So, proving the expense would be extremely simple. Just print out directly from a third party (Amazon).But the topper was that this corporation, an Internet seller, shut down in 2021. They have dissolved and liquidated their business.
The assets are long gone. The shareholders and officers have moved away. The only person I was still in contact with is the bookkeeper.
I asked her to get me a signed POA (power of attorney) which I faxed (yeah, I know… FAXED) into the IRS. Five months after sending the fax, the POA had finally been processed and I got a call.
In those 5 months, the bookkeeper moved away and fell off my radar. Her email account has changed and I have no way to get hold of her.
I told the IRS auditor I could get her those pieces of information called for in the initial letter, but the company was gone. The shareholders are gone. The officers and bookkeeper are gone. I would make this one call and then revoke my POA because no one is paying my bill.
The auditor was speechless. “How am I supposed to audit this company then?”
I let the silence stretch until she said she needed to talk to her manager and she would get back to me.
That was 4 weeks ago. Crickets.
What is the lesson? C Corporations are notoriously hard to audit. The IRS auditor was trying to approach the C Corporation like a Schedule C. It will not work. They are set up differently and they can easily close and spring up in another form, just like a mushroom in the forest.
The new IRS audit force will be less sophisticated. A C Corporation will be a great business structure to have if you want to avoid or limit your audit risk.
A tax tip: Learn more about C Corporations as part of our Wednesday Coaching systems. There are some tricks and traps to setting up and running them. Do it right, though, and you’ll pay less tax, get more privacy and have a lot lower chance of an IRS audit.
- One of my clients recently received a letter from the IRS. The IRS wanted proof of just a few thousand dollars of withheld tax.It has been years. Decades since I have seen a request like that. The IRS has had a tried-and-true matching program for 1099s, 1098s, W-2s and K-1s for years. They do not need proof of withholding. They already know from the company or employer what was withheld.
There was one big problem this year.
The IRS shredded 30 million informational documents. That means those 1098s, 1099s, W-2s, K-1s, etc. all ended up in little tiny pieces.
There is no way to match what you reported with what your employer/company reported.
I suspect we will see more of these requests in the future.
And in another touch of irony, she was instructed to NOT fax the information. Do not call the IRS. Mail it in.
So one more piece of mail will stack up in a warehouse. At least the IRS must pay 6% interest on refunds that take over 45 days to get to you.
My advice here is to just comply with what the IRS wants. Make sure you’re keeping track of your records because you can bet the IRS isn’t.
- One more. This was a friend who prepared her own return on Turbo Tax. The IRS cut her refund in half with no explanation. She called Turbo Tax. They had no idea. It took her days, but she finally got someone at the IRS. They had no idea, but could transfer her to the tax legal department. Transferred her and the message said that the department no longer took phone calls.I looked at the return and saw a silly little mistake she had made. I don’t know if she made the mistake or if Turbo Tax had made it, but either way, it was an easy mistake to fix.
The bad thing was that I doubt she would have ever found out what happened. Turbo Tax would not help. Neither would the IRS.
How many people will have a similar issue and just have to walk away from almost $4,000 like she thought she would have to do?
Here is How I Can Help
For the most part, you have two choices if you get an IRS letter that they are auditing you, want more information or have inexplicably cut your refund. Or, worse yet, they send you a bill with no explanation.
You can call the IRS and try to navigate the current murky waters at the IRS. Maybe you will luck out and get a knowledgeable, friendly voice on the other end of the line. My experience lately has been that you will probably not.
Try to find a tax professional to help you. TRY to find one is right. CPAs are retiring and quitting in record numbers. There is more work than ever before and fewer people to do it. If a CPA prepared your tax return, you have the best chance of having someone who can advocate for you. But you will have to pay for the time they need to spend with the IRS. And it could be expensive.
I have another choice if neither option is good for you. I’m going to open up coaching to review IRS (and state tax authority) letters that my coaching clients receive. It will be part of the 4th Wednesday Coaching session each month. I will not disclose your name, location, business names or any other sensitive information.
I will go through the letter code in the upper right-hand corner and tell you what that means. We will look at exactly what the letter means for you and the next best steps. If you decide to go ahead by yourself or with a tax professional, you will be better equipped by having the information pulled together.
Remember this is ONLY part of Wednesday Coaching and this part will be on the 4th Wednesday of each month. If you are a coaching member and you get an IRS letter, just redact your identifying information (name address, social security number, etc.) and attach the redacted copy to an email to Coaching@USTaxAid.com.