Should you fear the Internal Revenue Service?
Not if you know your rights as a taxpayer and you respond to the first notice you get from the IRS, says Scott M. Estill, a tax attorney.
That's part of the nonconfrontational advice Estill offers in "Tax This! An Insider's Guide to Standing Up to the IRS" (Self-Counsel Press, 2007 edition, $21.95).
"No tax situation is hopeless," writes Estill, who is a former senior trial attorney for the IRS.
Many tax situations deteriorate because people don't know what options are available to them. If you are facing an audit, haven't filed a tax return in years, or received a tax bill from the IRS, pick up "Tax This!" It's my May recommendation for the Color of Money Book Club.
Estill writes that it's important to overcome your natural instinct to avoid contact with the IRS. Instead, it's vital that you inform the agency whenever you change your address. "You have nothing to gain by trying to hide from the IRS, and you have much to lose by doing so," Estill warns. "It is almost always better to confront any problems as soon as possible rather than waiting for the IRS to catch up to you."
You may be thinking that with all the taxpayers in the country, the chances of the IRS bothering you are pretty slim. Indeed they are, but the IRS has been increasing its enforcement actions. In a report on such efforts, commissioner Mark W. Everson said enforcement revenues -- the money the IRS gets from its collection, examination, and document reviews -- increased to a record $48.7 billion in fiscal year 2006. The number of field audits increased nearly 23 percent from the previous year.
Earn a hefty income? Be forewarned that the IRS plans to be extra vigilant concerning high-income taxpayers. If you earn more than $100,000 a year, you're a lot more likely to be audited these days than just a few years ago. "We've put a lot of emphasis in increasing audits in this area because it's critical to ensuring faith in the tax system," Everson said in his report.
Audits of individuals with incomes over $100,000 surpassed 257,000 in 2006, an 18 percent increase from 2005. That's the highest figure in more than a decade, and well over double the 92,000 completed in fiscal 2001. Total individual returns audited increased from 1.2 million in 2005 to almost 1.3 million in 2006.
So what should you do if the IRS comes looking for you? Here are some basic rules to avoid major problems:
Don't ignore deadlines. "Many taxpayers get themselves in unnecessary trouble with the IRS because they don't do something when the IRS wants it done," Estill writes.
Get it in writing. When communicating with the agency, be sure to take notes and send a follow-up letter documenting what was said and promised. Keep every notice and letter you get from the IRS.
Know your options. For example, if you failed to pay your taxes because you didn't have the money to cover the entire bill, research the payment options so that when you talk to the IRS, you have a plan. For information on payment options, go to irs.gov and click on the link for "Tax Payment Options."
I like this book because Estill has managed to write a concise instruction manual in lay terms for just about any encounter you might have with the IRS. One of the most useful sections is an explanation of the IRS record-keeping system.
Worried about an audit? Estill provides clear step-by-step advice on the audit process. The first thing you should do is get a copy of IRS Publication 556 "Examination of Returns, Appeal Rights and Claims for Refund."
"If you refuse to give in to the fear factor, you will be on a more level playing field with the IRS during the course of the tax audit," he writes.
Each section of "Tax This!" ends with a bulleted list of tax points that summarizes the highlights of Estill's advice in each chapter. (Be sure to get the 2007 edition.)
This isn't an IRS-bashing book, although Estill is often critical of the agency's bureaucracy. What you get is a useful guide to improve the chances that if you do have an encounter with IRS -- other than filing your tax return -- you'll be better equipped to handle the situation.