Luckily, many of us will never have to undergo a tax audit or dispute an issue in Tax Court. Even so, it’s good to know what you’re up against if things ever go awry. There are a number of people who have been badly burned by the system. These are some of their stories.
Tax Horror Story #1: Lies the IRS Agent Told
Tim and Tracey Kerin went through a hellish ordeal when their company expenses triggered a tax audit. Apparently, their CPA had improperly figured their expense categories and the couple neglected to thoroughly read the forms before signing.
"A lesson moving forward is that every business owner should spend time with their CPA and bring their Quickbooks in and go over every expense account to make sure it complies with the current tax laws," said Tim. "Also, you should visit your CPA on a regular basis and not just at tax time when the year is already closed out."
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During the audit process, the Tim and Tracey reached out to the Taxpayer Advocate Service (TAS) to help resolve their issue. On the IRS website, the TAS is touted as “your voice at the IRS” whose job it is “to ensure that every taxpayer is treated fairly.”
But when the TAS contacted the IRS on the couple’s behalf, it only seemed to infuriate the IRS agent involved in their case. "She complained to our CPA and notated how upset she was on our forms," Tim recalled. "By us doing this we upset the IRS agent so she put the screws to us even harder and ignored the TAS. Our civil rights are now gone."
The Kerins then met with the Deputy Chief Council of the House Small Business Committee on Capitol Hill to argue their case. Tim reported that the IRS agent had completely lied about her findings because she didn’t have time to review the nearly 4,000 pages of documents the couple had provided.
"The Deputy Chief Council responded that this is unfortunate," noted Tim. "Tracey said, 'Unfortunate is when my cat gets hurt! This is criminal.'"
So far, the couple has spent over 30 months trying to defend their company against an expense audit, costing them upwards of $95,000 in accounting and legal fees. "We now have to spend an additional $15,000 in appeals to defend ourselves against the lies of the IRS agent."
Tax Horror Story #2: Guilty Until Proven Innocent
Freelance writer Joan Barthel had a horrific tax audit experience in 1986 while living in Manhattan with her husband.
The couple had owned a summer home in Connecticut that burned down the previous year, so her husband claimed a tax deduction. “Two agents came to our apartment in New York and came in like storm troopers, just big bullies,” Barthel recalled. “They said, ‘Your calculations were inaccurate and you owe $14,000.’”
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Barthel was shocked by how aggressively the agents behaved, treating the couple like criminals who had set out to intentionally defraud the IRS. “Starting out with those two guys — they were so gruff and mean,” she said. “They came in assuming I was a criminal and had deliberately tried to cheat the United States government. It was ‘guilty until proven innocent.’”
“As a layperson, you’re up against this monolithic organization represented by two guys who are yelling at you,” Barthel continued. “You’re at a disadvantage to say the least.”
The IRS demanded that Barthel provide a ridiculous amount of detail for her case. “I’m a writer, and the house was filled with books. They wanted the name and author of every book I lost in the fire. I was in tears. It was just horrible,” said Barthel.
The IRS also added interest charges to the alleged debt, as if losing a house in a fire wasn’t enough of a burden. The couple got a lawyer, who took their case pro bono and represented them in tax court. But the case went on for so long that the couple accumulated $2,000 in interest alone. Barthel and her husband eventually settled for about $4,000 total.
“It was horrible. I blocked it out, and I’ve thrown out all the paper,” Barthel said.
Tax Horror Story #3: “I Never Want to Start a Business Again”
Paul Hatz from Boston has been busy trying to appeal the results of a 5-year-long “nightmare audit”.
According to Hatz, the auditor neglected to send out the proper statutory notices of deficiency — a denial of “the most fundamental taxpayer right, the right to appeal what an auditor says,” Hatz stated. Nonetheless, Hatz was served with a $110,000 personal tax lien.
The actual issue was not his personal tax liability, but the liability of the C corporation he ran. By definition, a C corporation is “recognized as a separate taxpaying entity” (source: IRS.gov).
“To add insult to injury, this ‘tax’ was all because the auditor miscategorized money I invested into the corporation as ‘income,’” said Hatz. “I know this sounds crazy, and I wish I made it all up.”
The auditor’s mistake caused Hatz to lose the $100,000 investment he had made in his corporation. On top of that, the IRS sent him a $110,000 tax bill because he did not report the money as income.
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Hatz hired a tax lawyer and even had a Congressman get involved. But unfortunately, the audit process was so financially damaging that Hatz was forced to close his small business, which had employed more than a dozen people.
He also spent $60,000 in attorney and CPA costs, and had to declare bankruptcy. Since then, Hatz has become a stay-at-home dad while he lives off unemployment and searches for a job. The whole ordeal has ruined the idea of personal entrepreneurship for Hatz.
“I never want to start a business again,” Hatz stated. “Large corporations with teams of tax attorneys and CPAs can deal with an audit. If you get the wrong auditor and are a small business struggling to make ends meet, you are done — out of business regardless of whether you did anything wrong or not.”