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IRS agents represent the interest of our government.  They are not there to help you, even if the agent should state otherwise. The IRS's definition of having their examination agents "helping" taxpayers is not what most taxpayers consider "help."

IRS has declared "war" on sloppy record-keeping day traders and they are ramping up field audits and office audits of daytrader's tax returns, especially those where taxpayers negligently failed to attach a list of each securities transaction as is required. 

With support from the National Office the IRS has at their disposal the means to attack from years of Tax Court cases won by the IRS.  (The tax court cases won AND LOST by the IRS are discussed in the
TradersTaxPlan)   Often it is the "helpful innocent admissions" by taxpayers in the first communications with the IRS that peg-hole them as "tax abusers" and your case is lost even before you even start!

  Do not speak to the Internal Revenue Service.  Eventually it will likely cost you more than you might ever realize could be possible at the time.  Doing a tax return by yourself is one thing... trying to respond to a direct IRS inquiry is totally different.

You will not be helping yourself.  You will not be saving yourself trouble in the long run.  You will not be making the job easier or any less expensive for your professional representative by "helping out" by "just talking" with the IRS to see what they want.  You will actually be making your representation more difficult and the professional fees to lay out a proper representation on your behalf will be higher.


IRS Manual tells agents how to spot improper pastime deductions.

The latest 2009 "audit technique guide" covers the application of what is known informally as the "hobby-loss rule." This is the Internal Revenue Code provision--Section 183--that prohibits taxpayers from reducing their taxable income through losses generated from activities...

The hobby-loss rule comes into play primarily when a taxpayer claims a loss on his tax return's Schedule C for a questionable activity and that loss is then used to offset other taxable income--like from a day job or from passive investments. What can draw the most IRS scrutiny are claims of big losses for several years in a row.

The manual suggests that agents attempt an end-run around a CPA or other tax adviser that a taxpayer might bring to an audit interview. "Direct the questions to the taxpayer," it states.

Higher profile occupations include:

Fishing Horse Racing Bowling
Farming Motorcross Racing Auto Racing
Craft Sales Professional Gamblers Fishing
Dog Breeding Yacht Charter Artists
Photography Stamp Collecting Bowling
Direct Sales Horse Breeding Writing
Entertainers Airplane Charter Rentals

Click here to learn from the "horror stories."

Click here first to discover why you should retain us to represent your interests before the Internal Revenue Service.

IRS announces examination targets for 2005:
74% or resources will go to their Small Business / Self-Employed Division [SB/SE]
targeting in order of priority:
tax avoidance transactions
high-income / high risk taxpayers
high-income non-filers
unreported income cases

criminal examination workload which includes:
S corporations

IRS to expand the SB/SE Pilot project for Fast Track Appeals (announced May 3, 2007) Cities on the East and West coasts to be added.

Tax Audits are hitting unprepared traders
The IRS National Research Program NRP or TCMP audits ran from late 2002 through mid 2003.  If you haven't been selected by now, breathe a sigh of relief!

"Aggressive Tax Deductions" as suggested on internet sites nets taxpayer up to 103 years and his accountant five years and a $250,000 fine.

Criminal Statutes used by the IRS are listed at this web site.

Have YOU been contacted by the IRS?
If you have already been contacted by the Internal Revenue Service about your Trader Status filing or your Mark-to-Market election, it is generally a good idea to immediately obtain professional representation before answering any questions or providing any information to the Internal Revenue.  Providing "the wrong" information a/k/a "putting foot in one's mouth" can cause irreparable damage to your situation.

Once you are selected for audit, do not make the mistake thinking that you merely need to provide your trading details and some other documentation to the IRS with a smile.  The IRS examiner will likely not have a clue what "Trader Status" is, and will disallow the tax benefits taken on the tax return.

If you are contacted by the IRS you need representation.  If you need representation please download form 2848  form 2848 ) "Declaration of Representative" fill it out as best you can and sign it.  Then see IRS Audit Representation  for our retainer fee information and What's needed to get started for other information to get together.

Don't be lulled into complacency. 
The longer you procrastinate, the worse it will get.  Taxpayers have numerous options available to their defense at the initiation of an audit inquiry.  The "doors" to these options start closing one by one as you delay in obtaining professional representation.  As the doors close you begin digging a deep hole that will be more difficult to crawl out of.  The costs to you in taxes and penalties and in professional fees rise as each door closes.

The IRS is currently targeting self-prepared individual trader tax returns showing trading losses and returns filed without the required detailed attachment of your trades and/or returns with large deductions on Schedule C lines 8 through 27.

The IRS is also targeting self-prepared entity tax returns showing trading losses and returns filed without the required detailed attachment of trades.

Whether you use us for audit representation or not, we implore you to immediately get out of the line of fire and retain a CPA, a tax attorney or other tax professional to represent you.  Most taxpayers are likely to be causing their case irreparable damage the longer they wait.

Are you playing the I.R.S. audit lottery?

IRS Tax Seizure Auction website:

Most trader status related audits come about because the definition of what a trader is, is not clearly understood.

Definition of a Securities Trader "Trader Status"
Definition of an Investor
Definition of a Dealer "Dealer Status"

How can you avoid an audit?

What should you do if you get audited?

F.A.Q. regarding tax audits

The Internal Revenue Service is now looking long and hard at the internet and its potential for abuse by taxpayers / tax evaders.

When you are finished with your tax return, take a look at the national averages to see how you stack up.  A trader's return oftentimes is quite a bit "off" from the averages,  but it is nice to know how far off you are so you can make sure you have extra good backup in those areas.

National IRS Averages

Internal Revenue Service audit seizure auction page

These links are the best from a wonderful web site of a Prairie Village, Kansas CPA. They're so good we list them here for you to read at your leisure:

How to Avoid an Audit

Little Known Tricks of the Trade

IRC §6405(a) requires notification to the Joint Committee on Taxation for refunds in excess of $2,000,000. The previous level of $1,000,000 was increased in 2000.

Why retain us to handle your IRS inquiries.
IRS controversy issues, tax return audits and even routine IRS and State inquiries are best handled by a professional CPA firm, rather than going it alone and risking "putting your foot in your mouth". Taxpayers signing a special IRS limited Power of Attorney may retain us to represent them with many of these issues. Contact us before you contact the IRS in response to an imposing inquiry.

Why use for your trader tax advisor? is the Web Site presence of Colin M. Cody, CPA, CMA.   Colin advises Security Traders and CPAs across the country regarding complex trader status issues.  Colin has been advising Security Traders on the Internet since 1991. 

Colin M. Cody, CPA, CMA has been instrumental in the authorship of the actual and forthcoming securities trader Tax Code by working with the drafters of the IRS Code while interpreting the intent of the US Congress when they pass the law.

Audits are handled for taxpayers in any of the U.S. States either by communicating with the IRS examiners via telephone, fax and mail or by transferring your case to Connecticut for face-to-face meetings with the IRS examiners and appeals officers.

More often than not Colin finds errors in the preparation of the tax returns under audit.  The errors made on self-prepared tax filings are responsible for initiating some audit inquiries.  Errors we find on professionally prepared returns are usually only found after a thorough review of your paperwork back in our offices and sometimes these have quite severe misinterpretations of the law.  

It is not uncommon for us to find that taxpayers have overpaid their taxes in prior years because regular tax rules were used rather than the proper Trader Status allowances.

If errors favor the  taxpayer and your taxes were overpaid, then we may prepare proforma drafts of amended tax filings to present to the IRS examiner during the audit.  If the errors favor the  IRS and your taxes were underpaid, then then we prepare for the possibility that the IRS examiner will also find those same mistakes.

Click here if you are ready to retain us for your audit representation.

Horror Stories (you just can't make this stuff up):
August 2005 - IRS fraud division contacted a taxpayer regarding a visit he made to the web site of a subsequently convicted abusive tax scheme promoter.  Apparently, he had only visited the web site, leaving his contact information and received some promotional materials from them.  He did nothing wrong, so he spoke freely with the IRS agent.  Big mistake.  Not believing the taxpayer, the IRS auditor initiated a full examination of the taxpayer and all his related entities.  While we've done a good job representing this taxpayer and so far the the IRS has left all items unchanged, including a couple entities related to securities trading, the time and effort to respond to the IRS demands and the CPA fees might have all be avoided had the taxpayer not "volunteered" information rather than telling the IRS to speak with his CPA to get all answers.

October 2005 - IRS non-filer division paid a personal visit to a chronically late filing taxpayer at his place of business, sitting in the waiting room until the taxpayer came out to see them.  Again this taxpayer, having been told repeatedly that as a non-filer he was going to eventually get into trouble, and further that since he recently received a certified letter from the IRS, that there was a good chance that IRS would be knocking on his door if he fails to respond to them.  We told him that if this happens to tell the IRS to see his CPA to get all answers.  He didn't.  He spoke freely with them telling them that since he merely has a W-2 and adequate withholding taxes taken out each week that even though he was five years behind in his filing, that he owed the IRS nothing.  This taxpayer then delayed another month or so before getting any of his tax papers into our office.  Because of statements the taxpayer made during that initial face-to-face visit, the IRS agent told us, was the reason that they placed a blanket lien on his real estate holdings in an amount in the low six-figures to make sure that the US Government was protected.  Now that the taxpayer has one of his properties listed for sale - this IRS lien will be a source of embarrassment and additional cost for his attorney to have the lien removed before the property can be sold.

November 2005 - A taxpayer received a huge IRS refund from a NOL carryback resulting from securities trading losses.  In addition he received an overpayment as discussed here:  Well, the IRS realized their error and eventually caught up with him, asking for the overpaid money back.  Rather than pay the overpayment back as we told him to do, he called the IRS himself and somehow got the idea he didn't need to send them the overpaid money right way.  Then more procrastination, didn't return the overpaid money and remained a non-filer for a few remaining tax years.  IRS served him with a "90 day letter" and a demand for a sizable six-figure amount of alleged underpaid taxes.  The CPA fees and possible attorney fees to address a 90-day letter could have been avoided if the taxpayer did not misunderstand when he spoke with the IRS on his own.

March 2006 - Against our advice, a taxpayer stood by his rights to maintain secrecy of the ownership of his Nevada corporation since the State of Nevada Secretary of the State insists that is a huge benefit of incorporation in NV.  Refusal to disclose private information about the ownership of the NV corporation made the IRS smell a rat and they decided not to initiate a regular examination but rather transferred the direction of the audit to take more aggressive legal action.  Taxpayer had to retain a lawyer for representation since we do only regular IRS audits here and do not practice law.  The initial fees for legal representation have gone over $10,000 and going higher.  This is many times the professional fees for a regular audit, had the taxpayer better complied with the initial IRS inquiries.

Don't be the next horror story!  Never speak to the IRS on your own.




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