Yes Virginia, I Got Audited, Too – The Story of My Personal IRS Audit

by Tom Buck

Those of you who regularly read postings on this site are aware of my passion for saving all the tax dollars you can, LEGALLY, by setting up your business properly. One of my approaches has been, and remains, to present seminars providing detailed information on how to maximize your tax savings. In the mid-2000s, the IRS decided they should audit people like me who might be promoting what the IRS termed “abusive tax avoidance schemes.”

Many of you are aware that there has been, in the past, a very distinct line drawn between “tax avoidance” and “tax evasion.” Tax evasion is strictly illegal, while tax avoidance in not only legal, but has been strongly recommended by some of the nation’s legal giants of the past, Supreme Court Justice Learned Hand included.

Recently, I attended an IRS conference for tax preparers. There I was able to get some clarification. Tax avoidance is still legal, but so called “abusive tax avoidance schemes” are not.

These “schemes” differ from “normal” tax evasion because the IRS can’t prove there was “intent” to evade. However, that will not deter the IRS from an aggressive approach to see if they can extract any additional dollars from taxpayers.

Because the IRS is casting such a broad net, they looked at all of us who are involved in trying to help people learn how to save tax dollars in their small business. Several of my colleagues have expressed dismay that the IRS was not be applauding us for trying to disseminate solid information about the tax laws, but such is not the case.

In any event, because of my involvement in this area of tax practice, I received a letter in October, 2003 informing me that the IRS intended to investigate me for promoting such “abusive tax avoidance schemes.”

In my practice we regularly have at least a few dozen tax problem cases in our inventory at any one time. As a result, it is not unusual for us to receive two or three letters from the IRS each day – so receiving mail from the IRS never causes me any consternation.

gunpoint auditHowever, in this case, I could tell by the way the IRS letter was addressed that it was for me, personally. Believe me when I tell you that I know how it feels to get a letter from the IRS. I had a real feeling of anxiety as I opened the letter and felt even more anxious after I read what the IRS wanted from me.
I was to be obligated to provide all of my personal tax returns for the past five years. I also had to provide all materials that I used in teaching the seminars, as well as in my advertising.

As an aside, I have been helping people with IRS problems for well over thirty years, but that didn’t keep me from being a bit concerned over the prospects of being audited myself.

I followed the advice of the old adage that suggests “a lawyer who represents himself has a fool for a client.” I hired a top-drawer tax attorney. Through him I provided all to the information requested by the IRS, including my course syllabus detailing everything that I teach.

In typical IRS fashion, they wanted to meet with me three weeks later. (Please be advised that the IRS almost always demands that the taxpayer respond in what may be an impossibly short period of time. If you know how the game is played it is ALWAYS possible to get an extension.)

Of course, we requested and received an extension of time to respond. Through my lawyer, I provided all the information requested by the IRS, along with a request that they digest it first before we met with them.

By February, 2004 we received a request for a face-to-face meeting with the IRS. We met at my attorney’s office in Omaha, Nebraska for all of about forty-five minutes, much of which time was spent discussing generalities.

I am extremely grateful to be able to report that the result of the IRS’s review was a “letter of discontinuation.” Contrary to the interpretation that could be given this euphemistic phrase, a letter of discontinuation states that the IRS will no longer pursue me as a possible promoter of “abusive tax avoidance schemes.”

I would hasten to add that the IRS states, emphatically, in the letter that its actions should not be interpreted as IRS endorsement of my materials.

I would also hasten to add that I wear the “letter of discontinuation” as a badge of honor. My thought is this: the IRS would NOT have dropped their case if they felt that I was disseminating bad information, promoting misuse of the tax laws, or recommending “abusive tax avoidance schemes”.

The lesson for all of us here is this: The Internal Revenue Service is very willing to take strong stances against your perfectly legitimate approaches to applying the tax law. I believe we are all entitled to pay as little as possible in taxes as long as we stay within the law.

At Buck, CPA we operate on the premise that the worst case scenario would be “an honest disagreement” with the IRS. If audited, we may have some additional tax to pay, but there will be no penalties for “evasion” or “illegal tax avoidance schemes”.

We are more aggressive (than many taxpayers and even tax preparers) in our approach to applying the tax laws and you should be, also. If you do not take every LEGAL opportunity to save tax dollars, you will pay the IRS more than it is entitled to and hurt your financial situation in the process.

If you are not sure about how your tax preparer measures up in this regard, please feel free to contact us. We’ll review your situation with you. If we can make a positive difference, we will offer our services.

By the way, ignoring mail from the IRS is a great way to get yourself into REAL trouble. You will recall that, even though I had real anxiety when I received my audit notice, I opened the letter immediately so that I could determine how to deal with it. Acting like the proverbial ostrich is not a good idea.

We defend our fellow citizens against their government by making sure the IRS obeys the rules.