Dodging the IRS Tax Audit

The IRS tax audit is not dead despite what you may have read in the newspapers and perhaps on this blog. While the individual tax audit rate was less than one in 119 returns at a measly .84% some groups of taxpayers got to enjoy more contact with their favorite governmental agency. These included sole proprietors where the IRS audited approximately 2.5% of schedule C businesses with gross income over $25,000. The IRS is well aware of the abuse associated with the earned income tax credit and therefore used its resources to audit 1.75% of these people. Taxpayers with income of $200,000 or greater enjoyed an audit rate of 2.61%. Millionaire reporters were the most likely to be subject to audit at 9.55%. How does one draw attention for a tax audit? Travel and entertainment, business use of a personal vehicle, hobby losses of all varieties, and of course the more recent failure to report foreign bank account investment information which has perhaps produced more additional revenue than all the rest.

IRS Levy

         An IRS Levy is a nasty thing. Clients often confuse a lien with a levy. The lien is notice to the world that a tax is due. It can encumber most all of the assets a taxpayer owns. It serves to guarantee IRS will get paid if a sale of those assets occurs. A Levy on the other hand is the physical act of taking and seizing a taxpayer’s assets. In some cases a taxpayer may have a chance to redeem them but in others the asset is gone for good. The road to a Levy is a long one. These days in most cases it is a fork in the road that need not be taken. When a taxpayer owes a tax the computer machinery at the IRS begins grinding out tax notices. Each of them becomes harsher in their language. For the uninitiated visions of loss of life and liberty come to mind. Those notices are highly effective in IRS tax administration as taxpayers begin coughing up almost immediately. Then there are those who use the circular file when they receive them. Lawyers must realize that the last notice received by the client sent certified mail return receipt requested is a Notice of Intent to Levy and a Right to a Hearing. At this point the IRS is no longer kidding. At the end of 30 days the client can begin losing their assets. During that thirty day window lawyers on top of the client’s problem can request an IRS appeals branch hearing and thereby avoid the asset loss until an impartial hearing at IRS has been held. That presumes of course that the client has kept the lawyer in the tax notice loop. The actual levy will be served upon the holder of the taxpayer’s assets. In Huckaby, DC California, a lawyer learned a very expensive lesson about the Levy procedure. In that case the lawyer’s client owed substantial taxes. The client received a substantial lawsuit settlement. The lawyer deposited the proceeds of the settlement into his firm’s trust account. While the funds were sitting in the possession of the lawyer an astute revenue officer who is an IRS collection person served a Levy on him. Apparently the lawyer contrived a way of getting the funds to his client without the payment of the taxes. In this district court matter the lawyer was held personally liable to the IRS for his client’s tax bill and in addition was subject to a 50% penalty for failing to honor the Levy. A lesson in tax administration too late learned.