Advanced Underwriting Consultants

WHAT EVERY FINANCIAL PROFESSIONAL NEEDS TO KNOW ABOUT FIGHTING WITH THE IRS

INTRODUCTION

Those who work with clients regarding financial matters often consider the tax implications of various strategies when giving clients professional advice.  In some cases, clients come to the table with tax issues that need to be solved.  In others, the advisor may recommend tax strategies that have some inherent tax uncertainty.  A few clients may be unlucky enough to have an unexpected tax examination thrust upon them.

Many of our clients have an irrational fear of the IRS, and will do everything possible to avoid a potential fight.  Others look at the IRS as simply another creditor, and they almost welcome the opportunity to negotiate over tax liability.

If the client and IRS are poised to have a tax disagreement, what should the client expect?  And what is the advisor’s role and responsibility in the process? 

The bad news is that it is almost impossible to avoid a tax examination by the IRS.  However, there’s plenty of good news:

  • According to the IRS itself, only about one percent of returns are selected for examination. 
  • A taxpayer can reduce the chances of having the return examined—and then fighting with the IRS—with a few sensible precautions. 
  • Even if the IRS examines a taxpayer’s return, the IRS itself says that they usually work the issue out. 
  • If the discussion between the IRS and the taxpayer escalates into a disagreement, the Service has established administrative procedures to allow a taxpayer to appeal the IRS’s position. 
  • At the end of the day, if the taxpayer and IRS still disagree on a tax issue, the courts can resolve the problem.
  • Financial professionals need to understand the rules that apply to a fight with the IRS, so they can

    • Guide clients through IRS audits or disagreements that arise in the normal course of a client’s tax life, and 
    • Coach clients in advance with regard to what to expect if the IRS challenges the client’s tax position.