Tax Return, Audit Experiences
Ben Franklin once said, "In this world, nothing is certain except death and taxes." For many taxpayers, it is certain that taxes and dealing with the IRS are among the most stressful and painful things in life, and death may be the only way to escape them. But we don't recommend this! If the idea of filing taxes and the worry of a possible IRS audit feels overwhelming, eFile is here to help. When you prepare and e-File with eFile.com, we guide you through the filing process by generating the correct tax forms so you don't have to worry about them. eFileIT now or by April 18, 2023.
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...
Prepare to prepare: tax audits and the Dos and Don'ts.
IRS Audit Stories and Other Taxing Experiences
What if the IRS will not send your tax refund because they say you are dead? That is what happened to a young mother from Philadelphia, PA. She is still waiting for her $3,700 refund because IRS records showed that she died 11 and a half years ago. Even after she provided Social Security Administration (SSA) documents to the IRS proving she is alive, the IRS keeps telling her to wait for her refund instead of correcting the error in their records. Don't have this happen to you! Be proactive and contact the IRS and/or Social Security Administration to update their records in case the IRS needs more information to process and issue your refund, as well as to reduce IRS Tax Return Rejections.
A young person just out of college and working his first job mistakenly claimed three allowances on his W-4. He also claimed the Head of Household status thinking that he was the "head" of his household (an easy mistake to make!). His employer didn't withhold nearly enough in taxes which resulted in a whopping $2,000 tax bill (which was a real hardship for this young person). Luckily he had an emergency fund and lived on boxes on Mac and Cheese for a long time after that. Don't let this happen to you! Use our free tools to plan out your W-4 so you don't owe the IRS at tax time!
When a Maryland dairy farmer had less than $10,000 deposited into a bank account at once, a bank teller told him it would be easier to keep his deposits low to avoid an IRS asset reporting requirement of more than $10,000. However, he was not aware that this was a crime until federal agents arrived at his farmhouse to inform him that the IRS had seized his money. He decided to fight back since he felt the IRS policy, as it was written, made him break it (and he thought the teller should have been prosecuted for misleading him). After four years of testifying before a congressional committee and appearing on worldwide television broadcasts, he became the first person to get his money back from the IRS. The IRS also updated their policy to state that it would only pursue seizure of structured assets from criminal activity.
Even Former U.S. Secretary of Defense Donald Rumsfeld got confused about his taxes! After he filed his 2013 Tax Return, Rumsfeld still did not understand if what he owed was correct or if his tax return was correct as he stated that the IRS tax code is way too complex, and neither he nor his wife could fully understand it. He stated that if he got audited, he would not know how much he should pay to the IRS. Below is a letter he wrote to the IRS on Tax Day 2014:
Donald Rumsfeld's 2014 Letter to the IRS
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. 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 did not accept his return because according to them he was supposed to put “0” anywhere there was a negative number, even though the instructions did not include information about it. 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 follow 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.
Years ago, many U.S. expatriates complained that the IRS tax forms did not have an option to put in a foreign address. However, they are still required to pay taxes on their income. Many were unable to file their taxes electronically. Thankfully this is now resolved and taxpayers can enter their foreign address and can easily efile their returns!
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 were forced to sell the service station because they were 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 former IRS Commissioner Douglas Shulman (2008-2012) 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 making phone calls and writing letters to get the problem solved.
Some state implement 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 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 in a timely manner. The IRS can also 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. Here are tips to help you if you owe the IRS.
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 cost the woman over $600 in accounting to solve that problem.
A youth soccer association got into trouble with the IRS for incorrectly filing the statuses of their referees. The association filed them as independent contractors because they paid them on a per-match basis. The IRS insisted that they should be filed as employees, and fined them for more than $330,000.
Some buyers of second homes can get into 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 would 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 paying an extra $30,000 in taxes.
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. Though the IRS gave the equipment back to her, her business sustained significant damage.
One man bought a store in the state of Texas, paying the previous owner full price. A few weeks later, he received a notice saying that he owed 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). Therefore, you should check for any owed taxes before you buy any business.
A young man filed his taxes in the 1980’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. Since betting is a form of gambling, which is taxable, the IRS sent him an audit notice. For the next four years, he owed taxes and didn’t get his first refund 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 had 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. See tips for effective tax planning.
A woman had to stop by the IRS office to get a problem resolved and decided to save postage by giving her 1040 form to an IRS agent. The IRS agent looked it over and said that it was filled out wrong. The agent proceeded to correct the mistakes and then passed it along to another agent in charge of re-fling. 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 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 on his tax return. However, the IRS disagreed because he didn’t technically own the gas station when the spill occurred, yet 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, the IRS counted it as income. The auditor found those checks, one of them not even deposited at a bank. Because of this, he received substantial IRS penalties for unclaimed income.
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Did you receive a tax audit notice from the IRS and/or state tax agency? Follow these two steps:
- Know what to do if you get audited by the IRS
- Be prepared for a IRS tax audit.
More Information on United States Tax History
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