Taxpayer Stories of Painful IRS Audit and Tax Experiences
It must be stated that the modern IRS is a much friendlier agency than it once was, and the types of stories presented here happen very rarely today. Nevertheless, the past experiences of some taxpayers when dealing with the IRS could be described as nothing less than painful...
Learn how to:
1. Avoid a Tax Audit 2. Prepare for a Tax Audit 3. What to do if you get audited
A Collection of IRS Audit Stories and Other Taxing Experiences
A man and his family inherited an estate from the man's father when he passed away. The estate was valued at $7.7 million, and they had to pay taxes on it. However, the real estate prices took a dive and they were only able to get less than half of the original value from the estate. However, they still had to pay the taxes on the full value, to both the federal government and the state. After taxes they only had a few thousand dollars left.
In the 1980’s, one teenager was preparing his tax return. He came across a negative number that he had to put in, and there was nothing in the instructions about dealing with negative numbers so he just left it the way it was. His tax return amounted to roughly $30. The IRS didn’t accept his return because according to them he was supposed to put “0” anywhere there was a negative number, even though there was nothing written in the instructions. The IRS showed the instructions for the next year’s tax return which did specify that rule. After many years of writing back and fourth, the taxpayer finally went to the local IRS and proved to the IRS agent that he was right. He finally got his refund years later after many hours wasted on explaining his situation to the IRS.
While most IRS agents act very professional and according to the rules, there are some IRS agents that abuse their position. One IRS agent from California was indicted for suggesting to delinquent taxpayers to refinance their mortgage to obtain the necessary funds. It turned out he was getting money from a mortgage company for his services.
A woman’s house burned down, and she was unable to recover her financial documents to properly file her taxes. She filed for a federal tax extension, but an IRS tax audit notice came in several weeks later. Since she couldn’t produce the necessary documents, she was fined for $18,000.
Many US expatriates complain that the IRS tax forms do not have an option to put in a foreign address. However, they are still required to pay taxes on their income. Many are forced to use the long forms and are unable to file their taxes electronically.
Learn more about reporting foreign earned income for U.S. expatriates.
One taxpayer was audited by the IRS, which is stressful enough. The auditor, however, went beyond the ordinary and requested receipts for every single purchase made in the last 2 years, including purchases that were very small. The taxpayer couldn’t produce all the receipts and had to face penalties.
A tire retailer in New Hampshire was presented with a $109,000 tax bill by the state of Massachusetts. That was because the state of Massachusetts claimed that Massachusetts residents crossed state lines to buy tires in New Hampshire where there is no sales tax. Following this case the state of New Hampshire passed a law stating that no outside state tax collection agency can attempt to extract taxes from New Hampshire businesses for purchases by non-New Hampshire residents.
One tax preparer who owned his own tax firm was raided by IRS agents because he was suspected of tax fraud. He was not guilty, and the court confirmed it. After his ordeal he sued the IRS and successfully obtained monetary compensation.
A man owned a service station and a car wash. He was able to make around $70,000 a year from his business. Then he passed away, leaving his son and wife to take care of the business. He left behind municipal bonds and a life insurance policy. However, the land that the service station stood on grew in value to around $1.7 million. They are now forced to sell the service station because they are unable to pay the estate tax on the property.
A man and his business partners liked to vacation in the Cayman Islands as well as use banks of the Caribbean nation. However, besides being a pleasant vacation destination, the Cayman Islands are also notorious for being a tax haven. The man’s ex-wife reported him to the IRS and he had all of his financial information seized for investigation. The man was arrested and placed under $5 million bail. He had to spend millions of dollars in legal fees to prove that he was innocent and did not evade taxes.
There have been several cases where IRS agents attempted to frighten the delinquent taxpayers. One agent purposely spent hours at a time outside of a man’s home just to frighten the taxpayer with her presence and force him to pay his debt. This, of course, happened before Commissioner Shulman ushered in the current days of the kinder, gentler IRS.
A man and his wife filed a joint tax return and mailed it. The next day the man thought that he didn’t sign his form, so he mailed another one that was signed, along with a note asking that they swap the forms if one of them isn’t signed so that they will have the properly completed forms. The IRS sent him a letter saying that he owed a lot of money for not substantiating his claims. Clearly, his signed Form 1040 never got swapped with the unsigned one. The man had to spend many hours, make many phone calls and write many letters to get the problem solved.
Some states are implementing substantial economic nexus tax laws. They allow them to see if a certain business needs to pay taxes to them if they earned income from state sources. That means that if you do business in another state, even for a day, you have established a nexus and have to now pay taxes on any sales that were made to a resident of that state. Your physical presence is not required for this to take effect, business conducted over phone, Internet, or fax is treated the same. There are many cases where this happened. For example, a chicken restaurant was given a $250,000 tax bill by the state of Iowa despite not operating in the state, but the substantial economic nexus law allowed it since it was probably sold to Iowa residents outside the border of Iowa.
The IRS has the power to collect the amount owed to it. It can go into your bank account and take your funds if you don’t pay for long enough. They place a notice of levy and extract the money from your bank account. However, one can avoid that by arranging for installments to be paid, but it must be done in advance. Noncompliance will just make matters worse. however, filing for bankruptcy usually stops the IRS from placing a notice of levy, and there are legal procedures done through the court that can stop the process as well.
One woman owned a company that was registered as an S corporation. The IRS audited her because the IRS wanted to investigate the charitable contributions that the company made as well as IRA contributions. They totaled no more than $2,000. It costs the woman over $600 in accounting to solve that problem.
A youth soccer association is in trouble with the IRS for incorrectly filing the statuses of their referees. The association filed them as independent contractors because they pay them on a per-match basis. The IRS insists they should be filed as employees, and fined them for more than $330,000.
Some buyers of second homes could be in serious trouble. A couple in California bought their dream home and kept their old one to rent it out. They got a tenant for their old home, but eventually he moved out and the house was vacant. They fell behind on their mortgage payments and the interest rate and monthly payments on their home started to rise. Foreclosing on their second home would result in forgiven debt that will not be tax- exempt under the Mortgage Forgiveness Debt Relief Act. Only forgiven debt on the person’s primary residence is tax-exempt. For the couple it would mean extra $30,000 in taxes, which they simply don’t have.
The IRS seized a woman’s equipment that she had in a beauty shop she owned. They then auctioned it off to get the money she owed them. However, it turned out she paid her taxes in full, but the IRS made an error. The IRS gave back her the equipment, her business sustained significant damage.
One man bought a store in the state of Texas, paying the previous owner it full price. A few weeks later, he receives a notice saying that he owes the state of Texas taxes that the previous owner didn’t pay. By buying a business you also acquire all of its debts including debts to the IRS. The buyer should check for any owed taxes, and the responsibility to do so rests solely on him.
A young man filed his taxes in the 80’s. He and his dad liked to frequent the horse racetrack to bet on horses. Their winnings were signed by him and he also put down his Social Security Number. When he filed his taxes he didn’t report the winnings that he got at the racetrack. The IRS sent him an audit notice. For the next 4 years, he owed taxes and didn’t get his first positive return until the end of the decade.
In 1994 a restaurant owner was greeted with gun-wielding IRS agents. One of his accountants for his business was fired for embezzling funds from the business. She went to the IRS and told them that her former boss was involved with gun trafficking and money laundering. It took a lot for the restaurant owner to clear his name, he even went before Congress to complain about the damage that his reputation sustained all because of a false accusation.
One man owned a business that was renting office space from a building that he owned. The man owned the building for quite some time and made improvements when he first purchased it but didn’t keep the receipts for those improvements. Over time he has been depreciating those improvements. When he was audited, he couldn’t even provide a documentation stating the price of the building when he purchased it. The accounting firm he was using had to spend a lot of time researching costs of buildings and improvements to come up with the information the IRS wanted.
A woman had to stop by the IRS office to get a problem resolved and decided to save postage and bring along her 1040 form to turn in. The IRS agent looked it over and said that it was filled out wrong. The agent proceeded to correct the mistakes and then pass it along to another agent in charge of e-filing. The second agent then told her that the form was filled out wrong and the first agent must have made some mistakes. He then proceeded to correct those mistakes. The correction and re-filing process took the second agent almost 3 hours to complete. Some time after the taxes were filed, the woman received a letter from the IRS stating that they found mistakes in her tax return and that they corrected them for her.
An owner of a gas station spent $300,000 of his money to clean up a gasoline spill that occurred at his gas station. He was lauded by the community for being a responsible person. He then claimed the cleanup cost as a business expense in his tax returns. However, the IRS disagreed because he didn’t technically own the gas station when the spill occurred. However, he was ordered by the state to clean up the spill.
One man started his own business and deducted some business-starting expenses. He was then audited and it was discovered that he forgot to mention dividend payments from a stock that he bought several years ago. Since he didn’t re-invest them, they counted as income. The auditor found those checks, one of them not even deposited at a bank. Because of this he received substantial penalties for unclaimed income.
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