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AuditJoan Smith, 52, a Philadelphia-based artist, was preparing to go in for spinal surgery in 2010 when the IRS put a $10,000 tax lien on her bank account -- which was more money than she had in the bank. It turns out she'd never received an audit memo that had been sent to her old address. She spent the next 11 months digging out from the paperwork avalanche that comes with a full audit.

It's the headache that we fear each year when we file our tax returns -- that we'll face the massive inconvenience of an audit plus have to fork over thousands of dollars in rejected deductions. As a Seinfeld episode famously put it, the audit process can be "the financial equivalent of a full rectal examination."

In fact the experience is rare -- only some 1% of personal tax returns trigger an IRS audit -- but for those few, it can cause emotional and financial turmoil.

A Long Struggle to a Surreal End

In addition to her independent work as an artist, Smith (right) was working for a nonprofit organization, a job that allowed her a tax write-off of a couple thousand dollars annually. That unusual deduction triggered the audit and her failure to respond to the notice led to the lien, which she discovered when her debit card was denied.

Instead of moving ahead directly with her planned surgery, she spent her time hunched over a muddled file drawer of papers, culling through receipts dating back to 2003. "It was insane," she said. "It wasn't the time to be digging through old records."

It gets worse: Her computer and its back-up hard drive had been stolen from her studio, which meant her neatly organized digital record of deposits and expenditures was lost.

But after all the sweat, an ironic conclusion: "Probably the most comical part was that the audit found I was owed $587 dollars in 2003," Smith said.

Scars That Don't Go Away

Tax audits can be fairly routine and often fairly painless, but for the rare few, the horrors don't go away.

Freelance writer Joan Barthel (below), now 68, was living in Manhattan with her husband when she endured an audit in 1986. Because their summer house in Connecticut burned down in 1985, her husband claimed a deduction that rang alarm bells with the IRS.

"Two agents came to our apartment in New York and came in like storm troopers, just big bullies," Barthel said. "They said, 'Your calculations were inaccurate and you owe $14,000.'"

taxesWhat amazes Barthel most, even after all these years, was the detail that was required of her. "I'm a writer, and the house was filled with books," she said. "They wanted the name and author of every book I lost in the fire. I was in tears. It was just horrible."

"Starting out with those two guys -- they were so gruff and and rough and mean," Barthel said. "They came in assuming I was a criminal and had deliberately tried to cheat the United States government. It was 'guilty until proven innocent.' "

For ordinary people not well-versed in the minutiae of the taxosphere, the audit experience can be intimidating. "As a layperson, you're up against this monolithic organization represented by two guys who are yelling at you," Barthel said. "You're at a disadvantage to say the least."

The IRS was adding interest to her alleged debt throughout the ordeal. Her razed home was a casualty loss and a hefty burden; the audit came as a second punch to the gut.

The Barthels eventually hired a lawyer, who ended up taking on their case pro bono and going with them to tax court.

In response to the "storm trooper" reputation, the IRS publicly tried to clean up its act during the Clinton administration. Yet most of the changes it made had to do with collections, according to Anthony Parent, the founding partner of IRS Medic, a law firm oriented toward those with tax troubles. There was a lot of congressional testimony about revenue officers' abuses, but there was no censuring of abusive auditors, nor were any concrete limitations placed on their powers.

IRS veterans refer to this period as "Rah Rah '98," Parent said -- a mocking cheer that represents the emptiness in the push for audit reform.

"It's just sort of the ebb and flow of Congress lambasting the IRS," Parent said, "while simultaneously demanding it do some pretty God-awful and difficult jobs -- like invading people's personal affairs to see what kind of money they made in any particular year."

Given that the typical auditor today was just a kid during the Clinton administration, Parent says, the public now can still expect "skittish" auditors who "if pushed into a defensive position, will lash out at a taxpayer."

When contacted about its audit policy, the IRS referred DailyFinance to its document Your Rights as a Taxpayer, which lists among them "a right to professional and courteous treatment by IRS employees."

But for those like the Barthels, policy and reality don't always match. They settled for about $4,000, far less than the $14,000 the originally IRS demanded. But the case dragged on so long they had accrued some $2,000 in interest.

"It was horrible," Joan Barthels said. "I blocked it out, and I've thrown out all the paper."

Will This Ever End?

For those still battling with the IRS, blocking it out is an unavailable luxury.

Paul Hatz of Boston is knee-deep in appealing the results of a five-year-long "nightmare audit" that concluded six months ago.

The auditor, Hatz claims, failed to send out statutory notice of deficiency letters -- thus denying him "the most fundamental taxpayer right, the right to appeal what an auditor says," he said -- and he was slapped with a personal lien for $110,000 in taxes. The liability, though, wasn't Hatz's, but rather that of the C corporation he ran -- by definition, taxed separately from its proprietors.

"To add insult to injury, this 'tax' was all because the auditor miscategorized money I invested into the corp as 'income,'" Hatz said. Because of the auditor's error, not only did Hatz lose the $100,000 investment he made in his corporation, he also got a $110,000 bill from the IRS for failing to report the amount as income.

"I know this sounds crazy, and I wish I made it all up," Hatz said.

Hatz hired a tax attorney and got a congressman involved. But as a result of the financial burdens of the audit process, Hatz ended up closing his small manufacturing business, where he employed over a dozen people.

Now he collects unemployment and takes care of his child as a stay-at-home dad while he looks for work. He's dropped $60,000 in CPA and tax attorney costs and has had to declare bankruptcy. He and his spouse keep their finances separate.

For all the trouble and expense Hatz has endured, the actual amount he owes is small by comparison: a measly $5,000.

The ordeal has left Hatz disillusioned with the idea of personal entrepreneurship.

"I never want to start a business again," he said. "Large corporations with teams of tax attorneys and CPAs can deal with an audit. If you get the wrong auditor and are a small business struggling to make ends meet, you are done--out of business regardless of whether you did anything wrong or not."

Advice From the Experts

There's no sure-fire way to avoid the attentions of the IRS auditors, but there are some tips on how to come out of the audit process relatively unscathed.

Joshua S. Barger, vice president of tax services at Foundation Financial Group in Manhattan, recommends keeping thorough documentation of travel mileage, medical expenses and meals-and-entertainment expenses -- the categories IRS auditors are most persnickety about monitoring.

"Whatever miles you've driven for business purposes, you need to keep proper logs," Barger said. "You need to write down what the odometer is when you start and then you need to write it down when you get home."

Unitemized receipts or credit card statements from a gas station aren't enough to prove you filled your tank -- you might have been buying other items from the adjoining convenience store.

Likewise, medical bills from a doctor's office are insufficient to indicate an expense for the IRS, Barger advises, because they don't prove you actually paid the money, nor do they show what portion of the bill may have been covered by insurance.

"Entertainment for business purposes" can be one of the most fluffed-up expense categories, Barger said. "People entertain a client and have a couple of cocktails, and try to write it off without saving the receipt," he said. That's a major no-no.

But fudging numbers is not the solution.

"Answer the questions that are put to you as best you can," said Julian Block, the attorney who represented Barthel through her tax audit saga. "Absolutely do not lie when you give an answer. Remember Martha Stewart? If you can't recall the answer, say so."

By the same token, be wary of over-narrating or elaborating.

"Answer only that which is asked of you," Block said. "Do not volunteer what might seem to you innocuous information ... it might turn out to be an additional avenue for inquiry from the IRS. There's no need for you to ingratiate yourself with the IRS auditor: This is not a social contact."






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klaracica

I had a wonderful friend Eva Galvin ( 2315 Stuyvesant Drw, NISKAYUNA , NY ) who destroyed me using my $ to invest on a market.Around + _ 35.000 what was my second mortgage.Had to sell house go bankrupcy, lost all the money had to pay it back to the bank.The IRS start coming after me I own 30.000 taxes HA.
I have zero disabled, have a mobile home, hardly making it evry month( 700 + $)
Tryed to take care of it for a long time have no $ to hire a atterney and it ws close to put me in a hospital.
I dont have money never had not a half million dollar they after me.If I would hade that kind of $ was more than happy to pay a taxes.
U cant have a bankrupcy DADA if U have a half million $ DADA
Thank U EVA GALVIN....IRS go after her.Also she was on welfare around 6 yearsago doing daytrading making 1000 of dollar a month.Why a IRS not going after her?????It would be to long to write all the detals.
She is doing good on my account and I was a one who suffered so much, without car, food, money etc,

March 25 2012 at 8:42 AM Report abuse rate up rate down Reply
Jill

next time dont have a bank account!! dummy

March 25 2012 at 7:59 AM Report abuse rate up rate down Reply
bogo1203

I'd relate my own experiences, tragic and life-changing, really, but I'm sure they read this stuff.

March 25 2012 at 7:59 AM Report abuse rate up rate down Reply
cwsac

I got a mystery yet to be resolved ... I received a notice from the IRS that informed me they were "reviewing my return before sending my refund". The funny thing is that I have not had taxable income for the past 20 + years and an IRS agent specifically told me that because of where I live ... I cannot claim renter credit, and because of my annua income there was no need to file taxes.
Mystery # 2 ... in 2008 (?) when everyone was suposed to file a return for year 2007? My wife and I went to a nationally know tax preparer who had us file a joint account. We were informed that we would receive $1,200 or whatever the amount was for joint filers was. We had signed the paperwork and sent it in as instructed. Sadly, before the refund was sent to our address, my wife passed away. The refund check was the amount for a SINGLE person ... maybe the second half of the tax refund is what they will send me (LOL) ... in any case I am not going to lose sleep over it

March 25 2012 at 7:36 AM Report abuse rate up rate down Reply
felixa555

I live oversees and I owed the IRS. As long as I could not afford to pay them I kept in touch with them every year telling them the status of my finances. One day I received my pension and was able to start paying them back.
Trying to contact these folks over he phone is an adventure.
Over a period of two years I received from different agents different amounts I supposedly owed them. Then came the letters with yet different amounts, higher every time. I had an agreement for a specific sum and I agreed to pay a certain sum every month.
Then I started to receive letters dated Aug 01 telling me to pay yet a higher monthly sum and to make sure the money is being received by AUG 26!. The letter arrived SEPTREMBER 01!!! I called them once more and they did it again!!!
For the remainder I owed them I wrote a personal check and told them that they were NOT to dip into my checking account again. They cashed my check October 13 and promptly withdrew more money from my account October 28.

The horrendeous experience was such that the day after I had mailed the remainder of the monies owed I had a severe heartattack.
To this day FIVE months later the IRS has NOT REFUNDED the money they withdrew without my permission. I do not know why MAFIA behavior comes to my mind.
I still have an appeal going...almost a year has passed and NO WORD from these people!

March 25 2012 at 7:26 AM Report abuse rate up rate down Reply
vallowery1

Just went through this crap myself. They claimed to have sent some letter to a 2 year old address of mine even though they had my current address. They started with 2007 claiming I had not filed and because of the interest and late fees between the 2007 filling and the time they contacted me the amount due was over $14K.
Now get this; I had a record of the check and got a copy of the cleared check to the IRS from my bank for the exact amount they claimed I originally owed. Then when I refiled the paperwork, at their request, it showed that they owed me about $1700 which they promply said they would not return because it was over 3 years. They will ask for money from 7 years past but they dont give refunds if is has been over 3 years; do as I say not as I do. They also seem to not look at the fillings till it is past the 3 years, probably so they wont have to give refunds if they make a mistake.
After 2007 was taken care of, they then went after 2006 and 2008. They found a "non-reported income" which turned out to be interest earned on a closed bank account for $20 and $250 from another. Costing me $260 for 2006 and $1600 for 2008, again because of the interest between my filling and them finding it.
I got everything cleaned up now and I cant wait for 2015 when they start looking at 2009, 2010, and 2011 to see what they find.

March 25 2012 at 7:24 AM Report abuse rate up rate down Reply
rodoner

If the current administration gets its way, the IRS will be revved up again to help fill the insatiable tax, borrow and spend addiction.

March 25 2012 at 7:14 AM Report abuse +1 rate up rate down Reply
duque1

The IRS took my wife an I thru the ringer as well. They took our retirement fund from our annuity and left us virtually broke. We are in iur 60's and not ebough time left in life to recoop. I fired an employee and he in turn called the IRS and they opened a criminal investigation on me that lasted for seven years and found that no crime had been committed, but our accountant had made a mistake on our taxes three years prior. After their investigation, they said I owed 60 K in taxes from 9 years ago at this point, then they gave us a 350 K bill, and took all of our money. Hired attorney to no evail. They are out of control.

March 25 2012 at 7:07 AM Report abuse rate up rate down Reply
Don

There is no excuse for these storm troopers actions, we have ruels for collection outfits so why does the IRS HAVE anti constitutionel powers, everyons's afraid of them thats why no one will write new laws controlling them.

March 25 2012 at 7:01 AM Report abuse rate up rate down Reply
1 reply to Don's comment
gt

The accountants and lawyers jobs directly benefit from having our current broken, corrupt tax system. Who writes the laws? Lawyers and accountants. Do you really think they are going to help write laws that make their jobs disappear? Nope.

April 03 2012 at 2:11 PM Report abuse rate up rate down Reply
bill

I read the comments and I find NOT ONE person in support of the IRS. What part of " WE THE PEOPLE " are we missing here?

March 25 2012 at 6:20 AM Report abuse rate up rate down Reply
1 reply to bill's comment
gt

We the people and the constitution say that our current tax structure is actually NOT CONSTITUTIONAL. Look it up. The income tax is a non apportioned tax that goes against the very fabric of how our system of democracy is set up. "We the people" need to get rid of the income tax, set up a legal form of taxation like a national sales tax / flat fax / fair tax / consumption tax , get rid of the loopholes that the rich and power people in our country use to get out of paying their fair share, and abolishing the IRS. It costs "WE THE PEOPLE" Billions of dollars a year just to run our current tax system. Throw it out, instate a national sales tax, and I'll be glad to pay taxes. Taxing people on consumption is fair because you are not only paying for the product, but the 1000's of other unforseen costs that that product creates. Pollution, cancer etc. Those costs can easily pay for the programs that are created for those social issues. Taxing people on income is the equivalent of punishing people because they are working hard. F that!

April 03 2012 at 2:09 PM Report abuse rate up rate down Reply