10 Myths About the IRS

Myth No. 1 Federal income tax liabilities cannot be discharged in bankruptcy.

Wrong. This may be the most pervasive myth of all. Federal (and indeed state) income taxes are dischargeable in bankruptcy as long as (1) the original due date of the return plus any extensions is at least three years ago; (2) the return was actually filed by the taxpayer (not a substitute for return filed by the IRS); and (3) if the return was filed late, it has to have been on file for at least two years before the bankruptcy petition is filed. There are some other rules relating to dischargeability but if the return qualifies under the three rules stated above, the tax can most likely be discharged in bankruptcy.

Myth No. 2. Only high income taxpayers or returns with business income are subject to audit.

Wrong. The IRS's own statistics show that since 1992, although the total number of tax returns audited has remained about the same, the percentage of lower income taxpayers (returns showing annual income of less than $25,000.00) being audited has risen steadily.

Myth No. 3. IRS Auditors have the power to assess tax, penalty and interest against you, take away your assets and even put you in jail.

Wrong. IRS auditors review your returns to determine if the items shown on the return are correct and that there is evidence to substantiate the income and deductions on the return. The IRS Auditor cannot assess tax, collect money, seize property or bring a criminal action. The IRS auditor may only suggest additions to the tax or adjustments in the deductions by preparing a Revenue Agent's Report. The taxpayer is not obligated in any way to agree with the Revenue Agent's Report. If you don't agree with the Revenue Agent's Report, don't sign it-appeal it!!

Myth No. 4. Returns are selected for audit because of mistakes on the return.

Wrong. Nearly all returns selected for audit are initially selected for review by a computer program called the Discriminate Income Function or DIF Program. The DIF Program compares the deductions shown on the return to the average amount of the same deduction for all taxpayers with similar occupations, incomes and family structure. Each item on your return is assigned a DIF score based on how far the item on your return deviates from the average of the same item claimed on returns for the same occupation, income and family structure. For example, the average charitable deduction for a carpenter with two dependents earning $40,000.00 a year may be $1,500.00. If the DIF program sees a $40,000.00 a year carpenter with two dependents taking a $15,000.00 charitable contribution deduction, this carpenter's return will receive a higher positive DIF score, and the return may be selected for audit.

Myth No. 5. If I handle my IRS problem myself, the IRS will give me a fairer shake than if I hire an attorney or other tax professional to represent me.

Wrong. If you don't know your rights, you can't assert them and it is not the IRS Agent's responsibility to protect your rights. Don't fool yourself. The IRS Agent is a trained professional who is going to assess the maximum possible amount of tax against you. If you don't know your rights, especially your right to appeal the IRS Agent's audit report, you stand to lose many thousands of dollars. Think about it. You could probably pull an infected tooth yourself, but do you want to do that or do you want to go to the dentist?

Myth No. 6. I no longer have to keep receipts to substantiate my deductions, because the new Taxpayer Bill of Rights puts the burden of proof on the IRS.

Wrong. The new Taxpayer Bill of Rights allows the burden of proof to be shifted to the IRS in court cases only (less than 2% of IRS disputes end up in court) and only under very limited circumstances. This myth was created, or certainly perpetuated, by the media which trumpeted the change in the burden of proof in headlines but failed to provide the boring details about how and when the burden of proof could be shifted.

Myth No. 7. The IRS can't seize my home for delinquent taxes.

Wrong. The IRS can indeed seize your personal residence to satisfy delinquent tax liabilities. State law may exempt your home from state law creditors such as banks, credit card companies and retailers, but the federal law which the IRS follows does not exempt personal residences from seizure.

Myth No. 8. If I don't file a return, the IRS can't assess taxes against me.

Wrong. Nearly every person in the United States has his or her income reported on a W-2 (for employees) or a 1099 (for self-employed individuals, and for people who receive dividends, interest, pensions, etc.). Copies of those income reports are sent to the IRS and the IRS then looks for a return from that person which includes that W-2 or 1099 income. If the person who received the income does not file a return, the IRS has the authority to file a return (called a substitute for return) for that person, and assess the tax shown on the substitute for return, and begin collecting the tax.. The assessment on the substitute for return is usually far higher (sometimes as much as two or three times higher) than the amount which would have been shown on a return filed by the taxpayer.

Myth No. 9. If I can't pay the amount of tax shown on my return, I should not file the return.

Wrong. If you owe taxes you cannot pay, you should file your return on time anyway. The IRS assesses separate penalties for not paying and for not filing the return. The penalty for not filing the return can include a criminal penalty as well as a monetary penalty. The bottom line is this: The IRS considers failure to file a much more serious offense than failure to pay and you will be penalized accordingly.

Myth No. 10. The Federal Income Tax is voluntary. I cannot be required to file a return or pay income tax.

Right. However, you should be aware that there are hundreds of men and women currently in federal penitentiaries who voluntarily failed to file returns and pay taxes. I guess you could say that you can't be forced to file your returns and pay your taxes, but if you voluntarily fail to file your tax returns, you may also be volunteering for an orange jump suit and a year or two of room and board at Uncle Sam's expense.