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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."
The 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!
Warning: 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:
Tax Audits are hitting unprepared traders
Have YOU been contacted by
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.
Revenue Service is now looking long and hard at the internet and
its potential for abuse by taxpayers / tax evaders.
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:
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.
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: http://traderstatus.com/mark2mkt-1996.htm#interest 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.
November 26, 2015
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