The IRS issues about 50 million taxpayer penalties each year to the pool of about 100 million taxpayers who file returns. That would 1 out of every 2 filers if the penalties were evenly distributed! In reality, multiple penalties are bundled together and assessed against fewer taxpayers. Yet the number of automated tax penalty assessments for additional taxes is rising each year and this trend is predicted to continue. This harsh realty of tax penalties stands in sharp contrast to the published statistic that only 1 of every 100 tax returns of ordinary middle income taxpayers is audited. Statistics can lie, and this is a good example.
The main point here is that when you receive a penalty assessment letter from the IRS in the mail, the statistics do not matter. All that matters is that your tax return is being challenged. Your blood pressure increases. Your sleep quality may decline. You feel both angry and confused.
What you don’t realize in the moment is that these matters can be routinely handled and that many of these penalties reduced or dismissed. The IRS has many reasonable and fair (sometimes even generous) procedures and programs to resolve these penalties. The key in this situation is to control the emotion and simply deal with the examination in a logical and legal method that will result in the best outcome.
In most cases it makes sense to hire a professional who is well-equipped to deal both with the IRS and with you in your current difficult stressed-out condition (even if you don’t think you are difficult to deal with). Unfortunately, I’ve seen plenty of examples of settlement cases where the tax professional was technically competent but the settlement process failed primarily because the taxpayer was not acting reasonably and the professional was unable to communicate that point effectively. Even for a unemotional taxpayer, it can take longer to learn about IR procedures that is is worth and it is simply cheaper and more effective to hire a representative.
Typically the first question I get from a taxpayer facing a threatened tax penalty is “Do I need a lawyer?” In most cases the answer is , in non-criminal cases it dos not make sense to retain a lawyer from the outset. A skilled Enrolled Agent (EA) or Certified Public Accountant (CPA) is a better choice for handling routine tax penalty issues both from a skills/tasking match-up as well as the cost/benefit perspective. The best approach is to work with an EA of CPA who works in close communication with a tax lawyer. In some cases you may benefit from the lawyer’s input without ever retaining or paying for a lawyer. Then, in the slim chance that the settlement process goes terribly poorly, you have easy transition to help from a tax lawyer.
To help with these potentially stressful tax penalty issues, I offer both a free telephone consultation without document review as well as a flat fee consultation that includes document review and written follow-up. Find more information on the “services” tab above.
I’ve helped resolve several simple tax penalty matters have been dismissed quickly for a $300 fee after a single telephone consultation and written follow-up with IRS but others drag on and cost more.