Dealing with the IRS can be so frustrating. By the time you have dealt with one faceless phone operator after another after another after another, you may be ready to pull your hair out! Here are three secrets to give you leverage when facing the IRS.
This article is an excerpt taken from this podcast with Daniel Pilla
What are the secrets that the IRS is hiding?
Dealing with the Internal Revenue Service can be so frustrating. By the time you have dealt with one faceless phone operator after another after another after another, getting transferred from here to there and back again, you may be ready to pull your hair out!
I met an IRS specialist, Daniel Pilla, at a conference a couple of years ago and loved his talk so much that I bought his book, The IRS Problem Solver. I was recently re-reading it and I couldn’t help, but think of doctors.
A CPA friend of mine recently noted that docs are in the “sweet spot” when it comes to taxes. Physicians need to have plenty of tools in their tool belt to deal with Uncle Sam and his army of number crunchers.
In this book, Pilla noted that the IRS is spending $224 million to add nearly 3,000 new full-time employees. And they are out to get more!
His passion for understanding the ins and outs of the IRS came from his teenage years.
He got started in this business in the late 1970s as result of the problems his father had with the IRS. He was only just out of high school. His father had a small business in St. Paul, MN, and unfortunately got behind in employment taxes. The IRS came in and padlocked the doors on his shop and he ended up auctioning the equipment for a couple of cents on the dollar and then a short while later they turned their attention to the family home and they tried to seize it.
Pilla went over to the local library and, by his own admission, started fumbling around the Internal Revenue Code. He happened to stumble on to this one section of the tax code that deals with taxpayers' rights issues.
He discovered that the IRS was proceeding illegally to seize his parents' home! He sued the IRS and cobbled together a “mickey mouse“ lawsuit using the information that he saw in the law library and was able to stop the IRS from taking the house. This small decision has kept him going for years and years.
I learned three secrets from Pilla that every physician must know.
Secret# 1: The IRS Isn’t Cutting Back on Enforcement.
We've heard a lot about the IRS having resources cut in the last couple of years and there's been some truth to that. However, where the IRS is cutting back in terms of "budget savings" is not in the enforcement area. They still have full-pledge enforcement with audit and tax collection.
Where they are cutting back is with the number of taxpayer service folks that are available now.
They just don’t help people comply with the tax law the way they have in the past and the way that they should be doing it. This was expressed by a former IRS commissioner Margaret Richeston. She said at one time, "If the IRS was ever forced to make a choice between tax payer’s service and tax law enforcement, enforcement would win out every time."
Dan mentioned that the message he receives is, “We would rather grind you into a powder if you messed up, than help you get it right in the first place.”
Secrets # 2: Half of the Computer Generated Notices Are Wrong.
Consider this… there are 145 million individual tax returns that are filled with the IRS. That's just the individual tax returns! It doesn’t include the business returns. It doesn’t include the employment tax returns.
When you add all those in, it’s another hundred-million returns. There's a tremendous amount of data filed with the IRS every year.
They can’t possibly audit every return in a face-to-face environment. They know that. We know that.
Instead, they focus very, very intently on computerized audits. The percentage of computerized audits has exploded greatly over the last 10 years.
What happens is that folks get a notice in a mail. It’s scary! They automatically think that they are in trouble with the IRS.
Then, what happens? People simply whip out their checkbooks and write the check to the IRS without even wondering why they received the notice and whether it is right.
These notices simply say, “We found a mistake, but don’t worry we fixed it. Now you owe us $3,252. Please pay us now.”
The question is…. what was the mistake?
The crazy thing is many of these notices don’t tell you what the mistake was. They don’t tell you what was supposedly fixed or what the problem was.
What's scary is it’s almost half of those correspondences are actually wrong.
According to Pilla, “This has been documented over and over and over again. I have extensive research in my book… about the error rate and these notices. It’s even worse than that…. The IRS simply does not tell the truth when it comes to taxpayers' rights. They don’t tell the truth when it comes to the options that people half for dealing with the IRS.”
Secret# 3: Get Your Individual Master File and Learn How to Correspond with the IRS
The individual master file is the computerized account record that the IRS keeps for every person for every tax year. The individual master file records the date that your tax return was received by the IRS, the amount of tax liability that was assessed for the returned.
If the IRS did an audit, it will show you the amount of tax liability that was assessed for the audit and when it was assessed. It will show you how much money was paid through wage withholding or estimated payments or refund off-set.
In other words, it’s a complete account history or account transcript of what happened for that particular tax year and when it happens. It gives us great insight into what the IRS did or didn’t do in a particular case.
For example, if you haven’t filed tax returns for a couple of years, an individual master file transcript tells us what returns were filed and which returns were not filed. If the person doesn’t have information on how much withholding was taken out of his paycheck in a particular year, these transcripts can tell us not only the amount of the withholding but the source of the withholding as well.
He suggests that it’s a good idea to monitor these transcripts every couple of years because the post office loses mail all of the time. Most people don’t file the tax returns by certified mail. They just send them in a regular mail which he thinks is a mistake due to no statute of limitations being imposed on tax collections.
By sending your correspondence by certified mail, you will have a long trackable, history and it can relieve the burden of proof.
Physicians today are under fire is many ways. There is a target on your backs. A target marked by government spending, Medicare reimbursements, and higher-than-average wages (even though you sacrificed the first seven years or more of your career!).
Make sure to be aware of how you should interact with the IRS.
Enforcement is more and more of an issue and they are using computer notices rather than face-to-face interactions to do so.
However, about half of those notices are incorrect! Make sure to find out what are the “errors” that you made before you whip out your checkbook.
Lastly, if you do become the target of an audit, make sure to get a copy of your master file and send all copies of your tax returns & correspondence to the IRS via certified mail.
This way you have great record keeping and aren’t “donating” needlessly to Uncle Sam’s pocket.
After all, the money looks much better in your wallet…
5 Steps to Get out of Debt for Physicians, The Insurance Guide for Doctors, The Tax Reduction Prescription
The Freedom Formula for Physicians
Dave Denniston, Chartered Financial Analyst (CFA), is an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with. He is the author of , and his new book, . You can follow his latest podcasts at www.DoctorFreedomPodcast.com.
He’s glad to answer any questions about insurance policies or other financial matters. You can contact him at (800) 548-1820, at firstname.lastname@example.org, or visit his website at http://www.DoctorFreedomBook.com to get a copy of The Freedom Formula for Physicians.