Some of the most beleaguered taxpayers are women (usually) who discover that they’ve married tax problems or failed to divorce them. In joint-property states, the IRS can come after either marriage partner for the debts of both, and both marriage partners for the debts of either. It gets even messier when the IRS spends years chasing the guilty party and adding penalties and interest, only to dump the whole mess into the lap of the spouse who never knew there was a tax bill owed. Getting your future, present or nearly ex-spouse to sign a liability statement for back taxes won’t help, because the IRS does not have to abide by those papers.
The only defense, says Carol Thompson, a Monterey, Calif., enrolled agent (an IRS-certified tax preparer), is to make sure you don’t get married until your intended has a clean bill of tax health, and not to sign any joint returns you’re uncomfortable with. If you get divorced, make sure all taxes are paid as part of the divorce settlement.
Agency officials admit they’ve targeted independent businesses earning below $25,000 a year because that’s where they find hidden money. Often these activities skirt the line between hobbies and businesses and are used by taxpayers to write off personal expenses and hide undeclared income. If you’re continually running a business with high deductions and low–or no–income, document everything. If you’re a low-paid wage earner, your chances of being called on the carpet are far lower than you might expect from data that show the IRS gunning for the bottom bracketeers. Many of those low-income “audits” were notices sent to people who had taxes withheld at work but then never filed returns that might have netted them refunds.
Turbo Tax and other computer programs make tax returns so easy that some filers have figured they can spit out one return for the IRS and a healthier one for their mortgage application. But now lenders can check the incomes would-be borrowers report against IRS records. When the amounts don’t match, the applicant usually loses the loan, and the taxman finds the applicant. If you’re caught in a lie like this, the IRS is likely to perform a top-to-bottom audit of your return, and you can end up being charged with tax and credit fraud.
Although the IRS has reduced its reliance on scoring mechanisms to select audit targets, Prof. Amir Aczel of Bentley College in Boston believes there are still some numerical triggers. If your itemized deductions are more than a third of your income, you’ve entered “the gray zone.” If deductions top 44 percent of your adjusted gross income, expect an audit.
If all else fails and you get called to an audit, don’t go alone-and consider sending a tax attorney, CPA or enrolled agent in your stead. You’ll limit the examiner’s ability to go fishing and your own ability to talk too much and open up areas beyond the scope of the original audit.
When you get an audit notice, drag your feet, request extensions and take your time gathering paperwork, suggests San Francisco tax attorney Fred Daily, author of" Stand Up To the IRS" (Nolo Press. 1996). IRS examiners are under pressure to close files quickly and “an audit delayed is an audit well played.”
The IRS says you can bring tape recorders into audits, appeal findings you don’t like and take your troubles to the agency’s Problem Resolution Office at 800–829-1040. In this environment, it wouldn’t hurt to keep the Senate Finance Committee apprised of your actions, either. Sure, you’d be playing politics, but so what? The IRS will treat you right, and maybe you’ll get on TV.
