IRS Collections

What Could Happen If You Don’t File Your Tax Return?

sitting on floor working on taxes

It is not hard to fall behind on your taxes. This can happen for a number of different reasons, such as you were unable to afford any tax services, you simply forgot about the tax deadline, or you suffered a serious illness which left you unable to file your tax return. It can be easy to avoid filing your tax return and ignore any serious repercussions – until the IRS starts sending you notices informing you of your unfiled tax years or a delinquent debt you have failed to pay. The IRS has the ability to take action against you for failure to file so it is important to know what the possible consequences could be for not filing your tax returns. 

The IRS can file a substitute return for you

The IRS can file a Substitute for Return, or SFR, on your behalf if they notice a failure to file for any tax year or years. The IRS does not file an SFR as a courtesy for those who fail to file their tax return and will not include any exemptions or deductions. Because of this, filed SFRs can reflect that a taxpayer owes a tax liability. The IRS will also send out an informative collection notice stating that a substitute return was filed or if there is a tax balance associated with the SFR.

The IRS has no time limit to collect from you

When it comes to the IRS taking collection action, the IRS has no timeline as to when they can stop. Once the IRS assesses a balance against you, they can garnish your wages, levy your bank accounts, and place liens on your physical assets. Just because you have past tax years that are unfiled, it does not mean the IRS has forgotten. It could even mean that the IRS will have the ability to hold you liable for your tax balance for up to 10 years from the date that your balance was assessed. 

Failure to file your tax return could be considered a crime

For some taxpayers, failing to file your tax return could mean getting in serious trouble. The IRS could consider this a crime and assume that you are evading the liability that they have assessed on your behalf. Consequences for not filing your tax return could mean jail time or fines as high as $250,000. 

Why it is beneficial to file your missing tax return

Filing all outstanding tax returns is important in order to avoid having the IRS take collection action against you. Although there is not a time limit for you to file any past tax years, the IRS does put a limit on receiving a refund for a previous tax return. The IRS also allows you to collect on a tax refund for up to three years from the due date of your return.

Filing your tax returns may not be the most exciting thing to do and some may even dread the filing season as it comes every year. Regardless of how you feel about having to file, it is a requirement in order to stay compliant and out of collections with the IRS. If you do have unfiled tax years, it can be beneficial to speak with a tax attorney or a tax resolution company in order to resolve any outstanding debt you have for the unfiled years or any tax debt that was assessed against you when the IRS filed an SFR for you. 

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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How IRS Debt Can Ruin Your Travel Plans (and Jeopardize Your Passport)

The stress of owing the IRS can be overwhelming. The ever-present threat of having a lien placed on your assets, the fear every time you check your bank account to discover it has been levied dry, the strain of having the IRS garnish your monthly wages; these are just a few of the things that millions of Americans go through every day. Now, the IRS has made further changes to crack down on Americans who have not paid their taxes.

As of February 2018, Americans who owe the IRS more than $50,000 are at risk of having their passports revoked. If you have unpaid taxes owed to the IRS, it is important to either pay your balance in full or go on a monthly installment agreement in order to avoid having these travel restrictions placed on you. The State Department is now working alongside the IRS to not only revoke existing passports but to also deny any passport application for those with seriously delinquent tax debt.  (If you are overseas and your passport is denied, the State may issue a temporary passport that has limited validity to return to the United States.)  Essentially, until the tax debt is settled with the IRS, people will be placed on this new “No Passport” list.

There are a few exceptions to be aware of.  You won’t be at risk of being placed on the “No Passport” list if you are currently going through bankruptcy, if the IRS acknowledges you have been the victim of identity theft, or if there is a natural disaster declared on a federal level.  You may also be able to keep or renew your passport if you have a request pending for an installment agreement, have a pending offer in compromise with the IRS or if the IRS has accepted an adjustment that will satisfy your debt. And if you are placed on the “No Passport” list, the IRS will hold your application for 90 days to allow you to resolve your tax liability, pay your balance in full or enter into an installment agreement before revoking your passport.

This is yet another sign that the IRS is escalating their collection efforts against Americans who have unpaid taxes and another reasovn for you, as a taxpayer,  to stay current and compliant with their IRS filings.  If you are in the unfortunate situation of having delinquent IRS debt, it is wise to speak to a qualified tax professional who can help you evaluate your options sooner rather than later. Because when it comes to owing money to the IRS, delaying is almost always a losing strategy. For more information regarding on the IRS passport revocation and denial policy, click here!

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

IRS Criminal Investigation Releases Fiscal Year 2014 Annual Report

The Internal Revenue Service announced the release of its IRS Criminal Investigation (CI) annual report for fiscal year 2014.   IRS CI initiated 4,297 cases in FY 2014, focusing on international tax fraud, return preparer and questionable refund fraud, identity theft, public corruption, bank secrecy act violations, significant money laundering investigations and terrorist financing cases.

BN-IG445_IRSCYB_J_20150505144950“There is no doubt that we have had to be creative to overcome some of the budget challenges this year,” said Richard Weber, Chief, IRS Criminal Investigation Division. “But in so doing, we maintained a steady focus on what is important. Our highest priority is to enforce our country’s tax laws and support tax administration to ensure compliance with the law and combat fraud.”

Historical Snapshot and Agency Priorities

The annual report highlights the agency’s successes while providing a historical snapshot of the makeup and priorities of the organization. Lincoln Irey, the first chief of IRS CI, released an annual report every year during his tenure, which extended from 1919 to 1946.

As the only federal law enforcement agency with jurisdiction over federal tax crimes, CI boasted the highest federal law enforcement conviction rate in FY 2014 — an impressive 93.4%. Prosecutors nationwide routinely call on IRS CI to lead financial investigations for financial crimes ranging from identity theft to international tax evasion and transnational organized crime.

“We are incredibly proud of our conviction rate,” said Weber. “As a federal law enforcement agency, that conviction rate reflects the pride of our agents and the quality of our case work. We are the best financial investigators in the world and I am extremely proud of our special agents and professional staff.”

Big Wins for IRS CI

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in an effort to generate confidence in the tax system and encourage compliance with the law. The 40-page report includes case summaries on a range of tax crimes, including money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes. The report also reflects the diversity and complexity of CI investigations, which touch almost every part of the world.

511aa8b798600.preview-620For example, two of the biggest tax fraud stories of the year — Credit Suisse and Bank Leumi — are included in the report. In the largest tax fraud case ever filed, Credit Suisse pleaded guilty to conspiracy to aid and assist U.S. taxpayers in filing false income tax returns and agreed to pay a total of 2.6 billion dollars. CI also led the investigation against Bank Leumi Group, a major Israeli international bank that admitted conspiring to aid and assist U.S. taxpayers to prepare and present false tax returns and agreed to pay 270 million dollars. Bank Leumi also pledged to cease providing banking and investment services for accounts held or beneficially owned by American taxpayers. The Bank Leumi Group case marks the first time an Israeli bank has admitted to such criminal conduct.

“The budget challenges facing our agency are nothing new. In the past five years, CI’s staff has been reduced approximately 11 percent bringing staffing to 1970’s levels. This trend cannot continue,” Weber added. “We will continue to remain focused on finding and investigating great cases that make a real difference in compliance of our nation’s tax laws.”

How Has The IRS Fresh Start Initiative Adapted To Help Taxpayers?

Since its inception in 2011, the IRS Fresh Start Initiative has changed to meet the needs of taxpayers.  Its scope has expanded in several ways to cushion the blow of back taxes and penalties.

●        Taxpayers unable to pay their entire federal tax bills can apply for an Offer in Compromise (“OIC”) to reduce their tax burdens.  Essentially, the OIC allows taxpayers to settle their delinquent federal tax bills for less than the full amount that they owe. An OIC also streamlines the process of investigations and shortens the time that taxpayers spend repaying the IRS.  Taxpayers with complicated tax returns should employ the assistance of a  tax relief professional to negotiate a fair OIC agreement.

fresh start●        Taxpayers who do not qualify for an OIC can negotiate manageable monthly payments through an IRS installment agreement. Previously, taxpayers who owed more than $25,000 in back taxes were subject to an invasive income examination process to determine the amount of their monthly payments. The IRS Fresh Start Initiative has raised that limit to $50,000, making it possible for more taxpayers to negotiate a streamlined installment agreement. However, taxpayers owing less than $50,000 may still wish to consult with a financial professional to ensure that a prospective installment agreement is mutually beneficial, not just for the IRS.

●        One method the government uses to recover back taxes and penalties is the filing of liens against taxpayers’ property.  This could mean real estate, business assets, and vehicles.  A tax lien against property can make it difficult to get credit and can also result in  property being auctioned off.  Originally, tax liens would be filed automatically for taxpayers with delinquent federal taxes of at least $10,000.  The IRS Fresh Start Initiative has raised the lien-triggering amount to $50,000, although the IRS still has the latitude to file liens for taxpayers who owe less.

The IRS Fresh Start Initiative was introduced as a way to make it easier for taxpayers to compromise with the government when paying back taxes and penalties.  The changes made to the program since 2011 help the taxpayer settle disputes quickly, avoid inconveniences, and save money.

Congress Considers Provision to Turn Back Taxes Over to Debt Collectors

As of May 2014, the gap in federal income tax collection was approximately $385 billion according to Forbes. More than 5 million taxpayers were in arrears as of April 2014, the Washington Post reported. Under a bill introduced by Democratic Sen. Chuck Schumer of New York and Republican Sen. Pat Roberts of Kansas, the IRS would outsource collection efforts against delinquent taxpayers that its agents had been unable to contact within the past year to private collection agencies.

Schumer’s and Roberts’s bill was inserted into the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, sponsored by Democratic Sen. Ron Wyden of Oregon in May 2014. The EXPIRE Act restores several federal tax breaks that expired at the end of 2013. As of November 2014, the EXPIRE Act remained stalled in Congress.

courtsDebt Collectors and the EXPIRE Act

Efforts by private collectors to recover what the IRS calls “inactive tax receivables” would not apply to innocent spouses, military personnel deployed in combat zones and deceased taxpayers. However, heirs of deceased taxpayers may find themselves subject to collection efforts to recover estate taxes owed by the deceased. Taxpayers subject to penalties under the Affordable Care Act would also be subject to private collection efforts. Presently, four private debt collection agencies are approved by the Treasury Department: ConServe of Fairport, New York; Pioneer Credit Recovery of Arcade, New York; CBE Group of Cedar Falls, Iowa, and Performant Financial Corp. of Livermore, California.

The idea of using private collection agencies to enhance the collection of IRS revenues is not new. Past programs have netted limited success. A similar program administered from 1996 to 1997 resulted in a net loss of $17 million to the IRS, according to the Center for Responsible Lending. The most recent attempt to utilize private collectors to recover revenues from taxpayers in arrears took place between 2005 and 2009 and collected a total of $98 million. However, the program cost the IRS $86 million to administer. An additional $16.5 million was paid in commission to the private collection companies, resulting in a net loss to the IRS of about $4.5 million, the Post reported.

Support and Pushback

congressDespite past failures associated with utilizing private collection agencies to collect tax revenues, the Schumer-Roberts bill enjoyed bi-partisan support in both the House and the Senate. Advocates for the measure claimed that the IRS could net $4.8 billion in delinquent taxes over the next decade, according to the Post. Half of those revenues would be devoted to the cost of expanding research and development tax break for startup businesses. Another $1.2 billion would go toward hiring additional IRS agents and enhancing in-house collection enforcement. The remaining $1.2 billion would cover commissions paid to private collection agencies.

Schumer has been a longtime advocate of employing private collectors to recover federal tax revenues. He claimed that this particular measure would provide jobs for residents in his state’s poorest areas without requiring a reduction in federal jobs. Indeed, two of the four private collection firms presently approved by the Treasury Department to recover overdue tax revenues are located in Schumer’s home state.

Sen. Ben Cardin of Maryland pushed to revise the EXPIRE Act to remove the private debt collection provision. Rep. Steny Hoyer of Maryland and Rep. John Lewis of Georgia, both Democrats, also vigorously opposed the proposed bill, stating that private collectors are more focused on the bottom line than serving taxpayers. Other detractors noted that extra precautions would be required to protect sensitive taxpayer information from abuse by unscrupulous collectors. During past programs, taxpayers complained of abusive tactics by collection agencies, including harassment and threats.

calculateNational taxpayer advocate Nina E. Olson submitted a 21-page letter appealing to lawmakers in May 2014 urging them to reject the proposal. Olson insisted in her letter that the majority of taxpayers in arrears are financially unable to pay what they owe and not deliberate scofflaws. Olson also stated that paying commissions to private collection agencies was an unnecessary expense, because the IRS collects much of its revenue from delinquent taxpayers in the form of offsets of federal and state income tax refunds. Moreover, IRS agents have latitude to work with struggling taxpayers to form repayment agreements or make other arrangements to collect payments from taxpayers in arrears which private collection agencies do not have.

Tax Collection and the IRS

IRSThe IRS has a well-deserved reputation for being vigorous in collecting the revenues it is owed from individual taxpayers even without enlisting the aid of private collection agencies. Indeed, the IRS collects more than $2 trillion in federal taxes annually. The overall compliance rate for on-time payment of federal income tax is 84 percent.

The Treasury Department also has potent tools at its disposal for pursuing delinquent taxpayers domestically and abroad, including offsets of federal and state tax refunds as well as liens and levies. IRS levies in particular can be harsh, involving seizures of personal property or extracting significant chunks of wages and even Social Security payments and retirement pensions. A single person levied by the IRS in 2012 could have been forced to live on as little as $114.42 per week, reported.

How Taxpayers Loaned $192 Billion To The Government In 2013

Very few people enjoy paying taxes, and even fewer wish to overpay on their federal income tax returns. But 80 percent of taxpayers voluntarily do just that each year. Many of these same taxpayers celebrate when they receive large refund checks, failing to realize that they are merely recovering their own money.

According to an April 2014 article in the Washington Post, federal income tax over-payments by individual taxpayers totaled an eye-popping $192 billion last year. This figure represents the equivalent to one quarter of the entire federal budget deficit for 2013. By overpaying on their tax returns, taxpayers essentially provide the government with an annual 12-month interest free loan, a deal which the IRS does not reciprocate.

Regions with the Highest Rates of Income Tax Refunds

refundsThe regions with the highest rates of taxpayers receiving refunds are found in Appalachia and the Deep South. For instance, in Chattahoochee County, Georgia, an astonishing 95 percent of taxpayers received federal tax refunds during the previous year, according to the Post. It is no coincidence that these regions are also among the most impoverished in the country. Taxpayers in these regions of the country often have low or no federal tax obligation.

Many taxpayers in these areas also benefit from deductions and credits like the Earned Income Tax Credit (EITC), which is a refundable credit. Taxpayers who qualify for the EITC can receive some or all of the credits in the form of a tax refund check, even if they have no federal income tax obligation. The refunds of many low-income taxpayers in this region and elsewhere in the country are drawn from the EITC.

Areas with High Proportions of Taxpayers Owing Tax

dueAn additional 15 percent of taxpayers nationwide owed money to Uncle Sam, with an average tax obligation of $4,656, the Post reports. These taxpayers were largely concentrated in metropolitan areas on the East and West coasts, and in the Plains states. Many of these individuals were self employed entrepreneurs, ranchers and farmers, filing Schedule C, E or F along with their federal income tax returns.

New England and the Plains States

In Liberty County, Montana, only 38 percent of taxpayers received federal income tax refunds. Another 32 percent of taxpayers in Liberty County essentially broke even with Uncle Sam, neither receiving refunds nor owing additional federal income taxes. Liberty County is representative of the states in the upper Plains region, which featured a high concentration of break-even taxpayers. Other states with high numbers of break-even taxpayers include Michigan, Pennsylvania and Vermont, according to the Post.

Lending to Uncle Sam at Zero Interest

uncle_samIn 2012, the average tax refund was a whopping $2,742 according to the Post. And while many taxpayers enjoyed receiving those large checks, a broad consensus of financial experts agrees that it’s actually a bad financial deal. Taxpayers receive no interest on their refunds unless the IRS delays the processing of their refunds by at least 45 days after the filing date of their federal income tax returns. The amount of interest paid is adjusted quarterly. For 2014, the quarterly interest rate paid by the IRS on delayed tax refunds was a paltry 3 percent.

The IRS is not nearly so generous with taxpayers in arrears. Even if you file your return on time, if you don’t pay your full federal income tax obligation, the IRS tacks on a failure-to-pay penalty of ½ of 1 percent on the amount due EVERY MONTH or partial month after the filing due date. The total penalty can equal 25 percent of the amount owed. Taxpayers who request an automatic extension of time to file do not automatically escape the failure-to-pay penalty. These taxpayers must pay at least 90 percent of what they owe by the ORIGINAL due date to escape the penalty.

Neither a Borrower nor a Lender Be

moneyMost taxpayers understandably don’t want to owe money at tax time, so they hedge their bets by overpaying. While it’s a good idea to allow for a small cushion to cover income tax withholdings, the IRS also cuts taxpayers who honestly underestimate their tax obligations a bit of slack. You can escape what the IRS calls the underpayment of estimated tax if your total federal tax obligation is less than $1,000. You may also escape the penalty by paying 90 percent of the current year’s federal tax obligation or 100 percent of your tax obligation for the previous year, whichever is smaller. Wage earners can make adjustments in the withholdings listed on W4 forms. Self-employed workers can meet this obligation through quarterly estimated tax payments.

Many taxpayers enjoy receiving their refunds in a lump sum rather than as small additions to their paychecks. That’s understandable as well, but it’s not necessary to overpay Uncle Sam to achieve that goal. Simply divide your average tax return by the number of paychecks you receive. Open a savings account or money market account and deposit the resulting amount into your account with each paycheck. If you want, you can make periodic transfers from your account into a Certificate of Deposit or other investment instrument. At the end of the year, you will have accumulated a tidy sum that equals or exceeds what you would have received as a tax refund.

Why Am I Being Audited By The IRS?

Statistically, your odds of being audited by the IRS range somewhere between slim and none. Very few people actually receive those dreaded notices. But there are circumstances that can boost your odds of being audited considerably. In many cases, honesty is the best policy for avoiding an audit. But sometimes, there is little or nothing that you can do to reduce your odds.

Your Return Triggered an Audit Flag

red flag

You’ve probably seen at least one list of common “audit flags” to avoid. For instance, tax returns for people who are paid largely or entirely in cash, such as wait staff, are often flagged for audits. People who make large charitable contributions (and claim large charitable deductions) may also trigger an audit flag.

The problem is that many common audit flags are legitimate tax deductions or credits. For instance, if you are a consultant or entrepreneur with a legitimate home office, you’re entitled to claim the home office deduction. Likewise, if you are entitled to the Earned Income Tax Credit, it’s financially unwise to leave that money on the table.

You may not even realize that you have tripped an audit flag. For example, according to a 2013 report from the IRS Taxpayer Advocate Service, an astonishing 90 percent of tax returns for adoptive parents who claimed the adoption tax credit were flagged for review. Almost 70 percent of taxpayers claiming the adoption tax credit were subjected to at least a partial audit.
The take-home lesson here is that if your return stands out from the ordinary, you may very well trigger an inquiry from the IRS. But that’s no reason to skip out on legitimate tax breaks. Instead, maintain meticulous records so that you can justify your claims.

Someone Ratted You Out

Yes, it’s true, people really do turn in their spouses, friends and co-workers to the IRS, sometimes out of spite, but also from greed. The IRS Whistleblower-Informant Award pays informants up to 30 percent of all tax penalties and other funds collected as a result of provided tips. Even people who are involved in tax evasion schemes may collect rewards under the program. They must voluntarily provide information and their rewards may be reduced, but they still get paid.

Someone You Do Business With Was Audited

IRS audit

Do you do business with someone who has been audited? You may very well be next. At the very least the IRS may request clarification about your dealings with the person being audited. If your records are in order, you shouldn’t have any reason to worry.

You Filed Your Return Late (or Not at All)

Requesting an automatic extension for time to file your federal income tax return does not count as filing your return late, nor does requesting an extension trigger an audit flag, so relax. On the other hand, filing your return after April 15 without having requested an extension does make your return more likely to be flagged for an audit. If you fail to file a return, the IRS may file one for you – minus many tax breaks to which you may rightfully be entitled. If you file a late return, the IRS will hit you with a hefty penalty of 5 percent of the taxes that you owe every month for up to 5 months. Ouch.

You’re Really Rich


If you are a wage-earner who files a return with W-2 forms and reports income of less than $200,000, your chances of being audited in 2013 were a miniscule 0.4%, according to Forbes. During the same period, the IRS audited the tax returns of 1.2 percent of entrepreneurs and self-employed workers who earned less than $200,000. By contrast, the IRS tagged 12.1 percent of taxpayers with incomes over $1 million in 2013 and 17.1 percent of taxpayers with assets in excess of $10 million.

You Drew the Short Straw

The IRS selects a certain number of returns for audit strictly by random. But the recession and budget cuts have reduced the number of random audits in recent years. The number of random audits was likely further reduced during 2013 because of the sequester, according to Forbes.

Tax Tips: How to Prepare for an IRS Tax Audit

IRS audits are actually becoming less common these days, with the number of actual audits performed in 2012 dropping 5.3% compared to the year before. That trend is expected to continue due to budget cuts and new responsibilities that have been placed on the department, ultimately resulting in fewer IRS agents available to conduct examinations.

The number of IRS agents available to perform tax audits in 2014 is expected to be at its lowest number in over 3 decades.

Last year the Internal Revenue Service selected approximately 1,481,966 individual tax returns to audit, or roughly 1% of tax payers. While the mere mention of the words “tax audit” strikes fear in the lives of many, there is really nothing to worry about if you are chosen as one of the lucky few. Nothing to worry about as long as you are prepared and haven’t committed tax fraud, that is.

Find out why you were chosen to be audited

If you have been selected for an audit, that doesn’t necessarily mean that you have made an error on your tax return. Individual tax payers returns are selected using several different methods, including:

  • Random: Some returns are selected at random by a computer screening process, which can often involve a statistical formula that identifies returns that are out of the “normal” or “average” range.
  • Document Mismatch: Oftentimes the simplest slip of a finger while entering information on your return, could result in inaccurate information being submitted. This could include W-2 forms or 1099’s that are reported but don’t match the information provided.
  • Related/Partner Returns: Sometimes a return may be selected for audit when it includes transactions or other related issues with other taxpayers. This is usually found due to a business partners or investors return already being audited.

What type of audit are you facing?

There are actually 3 main types of audits that the IRS performs regularly. Depending on which type they have scheduled for you, it may end up being a fairly painless procedure for you. The IRS will always start the audit process by sending you a letter. This letter should tell you what kind of audit you are being scheduled for.

Correspondence audit (Form 566(CG)) This is by far the simplest form of an IRS audit. Usually a taxpayer will receive this type of an audit when they forgot something simple on their tax return (like a signature) or if more explanation is required of something more specific (like itemized deductions).

In-office audit(Form 3572) These types of audits are most commonly sent to people who are self-employed or who own small businesses. The taxpayer will be required to go to the local IRS office to explain certain things on their tax return. These types of audits can generally take several hours, but are usually resolved on the day of the visit.

Field audit (Form 4564) These are the audits where IRS Field Representatives will be sent to your home or your place of business to conduct the examination. That is usually because of the fact that there is too much information to send via mail or carry with you into the nearest office. These are by far the most comprehensive types of all the audits and can take multiple visits to resolve all of the issues involved.

Know Your Legal Requirements

There are many laws you should know with regard to the retention of your personal and business financial records. For example, all business records regarding any particular asset should be kept for as long as the asset is kept, plus three years. Payroll records need to be kept for all personnel for at least six past years plus the current year.

The IRS can include returns filed within the last three years when they perform an audit. They can also include additional years if a substantial error is found, but will generally not go back further than six years.

Gather the Necessary Documentation

Once you have identified the type of audit that is being performed, you can start preparing your supporting documents. The IRS will include in its letter to you any specific documentation that they will need to review during the examination.

The key to having all the documentation you need for an easy audit is to get in the habit of retaining all your documents in a clean and organized manner ahead of time. Every year when you file your return, you should maintain a file that includes any and all supporting documentation to go along with it.

Keep all of this information along with a copy of your W-2’s or 1099’s and a copy of the return you submitted with the IRS.

If you have not kept the tidiest of records for the year that is being examined, go through your return very carefully and try to recollect the information that got you to those figures originally. Once you have identified where the figures came from, you can try to find them again. For example, if you claimed a lot of medical expenses, you may have some luck by contacting the billing department of the hospital or Doctor’s office that treated you and requesting copies of your bills for that year.

Having to recreate records this way will certainly take you longer to collect, so make sure you start gathering all of your required documents as early as possible.

Organization = A Quick Audit

Keeping your records in a clean and simple manner is critical to a problem-free audit. If you have all of your supporting documentation in a well organized, professional manner when the IRS Field Agent comes knocking on your door, they will be able to get all the information they need to wrap up the examination quickly.

What if you’re not prepared?

If the date of your scheduled appointment with the IRS is soon approaching and you do not feel completely prepared, you can always try requesting more time. You should contact your auditor directly at the number that was provided in your notification letter to explain that you would like to postpone your appointment.

While the IRS agent is more than likely to want to work with you, it is important to remember that the sooner the audit begins, the sooner it can be over. It may be more beneficial to keep your original appointment and at least get the process going. You can then schedule a follow up appointment at a later date and time to submit any additional documentation that you were able to gather.

Obtain professional representation if needed

In any case, if you feel that you are in over your head or intimidated by the auditing process, it may be a wise idea to consult with a licensed tax professional. They can review your case information and all of the documentation that you are able to provide and better advise you on how to proceed in dealing with the IRS.

The most important thing is to remain calm and collected. The more organized you are, the better. And don’t forget to behave in your highest professional regard when dealing with the IRS agent directly. Your attitude and willingness to cooperate with their procedures will make the examination quicker and less painful for all involved.

Additional Tax Tips:

What Happens in an IRS Audit
What to do during an IRS Audit
How to survive an IRS tax audit

Are frequent flier miles or credit card points considered income by the IRS?

As a serial credit card churner, I am particularly interested in the IRS’s view on this matter, which is why I awaited with bated breath the United States Tax Court decision on the case between Parimal H. Shankar and the Commissioner of the Internal Revenue, back in August of 2014.

The issue in this case was whether Mr. Shankar had or hadn’t understated his income by $563 when he failed to report the Citibank points he used toward a trip. Mr. Shankar opened an account with Citibank and received some Citibank “Thank Your Points” as a reward. He then used those points toward the cost of a trip. The IRS argued that Mr. Shankar should have reported the savings from the ticket, the $563, as income.

The U.S. Tax Court decided in favor of the IRS. So does this mean all frequent flyer points should be declared as income? Thankfully no, the Tax Court was very careful about how it worded its decision and made it clear the decision was to have only a narrow application. The IRS sometimes considers frequent flyer miles and reward points as income, but not always. (U.S. Tax Court)

Welcome to the shady world of frequent flyer miles and credit card reward points. Hang in with me. We will get some clear answers by the end of the article.

So how does the IRS consider frequent flier miles or credit card points?

That is a good question. Are frequent fliers a prize, interest, a rebate or all of the above? The answer to that question largely determines whether they are a source of income and therefore taxable.

What has the IRS said on this subject in the past?

Nothing definitive or we wouldn’t be having this conversation, but a 2002 private letter ruling does provide insight on the IRS’s view on miles and points. The key section for our purposes says:

“ … the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

When I read that I gave a small sigh of relief. It didn’t last long. The next paragraph had this to say:

“This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.”

Another tidbit from the IRS’s collective psyche was revealed in IRS Publication 17 Other Income, which says under the section of Rewards:

“Rewards. If you receive a reward for providing information, include it in your income.”

Before the IRS vs Mr. Shankar case, the last time the taxation of frequent flyer points hit the media was in 2012, when it was reported that Citi had issued 1099-MISC tax forms to clients who had received reward miles for signing up for a new checking or saving account. At least two clients sued Citibank for not disclosing that information when they advertised the extra points. (LA Times)

So are miles or points taxable or not? 

The IRS is playing a wait-and-see game on this issue, so it’s impossible to be dogmatic. However, this much we can say from a careful analyzes of previous decisions, comments and rulings.

The Bottom Line: Rebate vs Interest

As indicated by the Tax Court decision on Mr. Shankar’s case, mentioned above, if you received the points or miles as a bonus for opening a bank account and making a deposit, the IRS could consider it as income.

This is because you are receiving the rewards in exchange for what amounts to “lending” money to the bank, which is interest and therefore a taxable source of income. Also, you didn’t buy anything to qualify for the bonus, so it can’t be considered a rebate.

To illustrate, last month Chase bank offered me $200 for opening an account and leaving my money with them for 6 months. There were no other strings attached so I was happy to transfer my emergency fund to another bank for $200. However, I know I’m going to have to declare the $200 as income.

The same would apply if I received 50,000 points or miles for opening an account. The only problem with points is that their cash value is not always easy to calculate. A ballpark ratio that often works is one cent per mile/reward point, but a lot depends on the rewards program and how you decide to spend your points.

Now the good news.

The IRS considers points you receive from using a credit card as a rebate. Sure, it may feel like free money when you get a signup bonus of $500 to spend on travel expenses, but you probably had to spend $2,000 to $3,000 in three months to receive the bonus. Technically, it’s a rebate.

As long as you had to make some kind of purchase or financial transaction to receive the points or miles, the IRS considers it as a price reduction not interest. This doesn’t mean things couldn’t change in the future, but right now, fellow credit card-churners, we are in the clear.

There is one caveat. The IRS will not allow you deduct a business expense you paid with frequent flyer miles or reward points. For instance, let’s stay you are the owner of a company and you declare the cost of plane tickets on a business trip but you pay for the tickets with points or frequent flyer miles. The IRS considers this as double dipping. If you use miles or points to pay for expenses and then declare the full cost as a deductible expense, you could get into trouble with the IRS.

Learn more about tax deductions for business travel in this article.

How You Are Notified of an IRS Audit

If audited, individuals can face financial burdens that last for years. Understanding how the IRS notifies people being audited is one way to be prepared for this unfortunate situation.
When the IRS audits a person, he or she is sent a letter by the mail or with a telephone call. Email notifications are not how the IRS notifies people about an audit and should be reported.

Related article: Dealing with an IRS Audit – 10 Expert Tips

Generally those who are audited fall into some common categories:

  • Being wealthy – 12.5% of those who make over one million dollars a year are audited. The IRS is diligent in checking that these individuals are reporting their income correctly.
  • Making mistakes – These mistakes are generally failure to report all income, mismatched or transposed numbers from the employer’s W2, or incorrect calculations like rounding errors.
  • Self-Employed – The IRS checks the deductions of a self-employed individual and compares them to others who work in the same industry. Records concerning home offices should be kept in case.
  • Making large donations to charities – The IRS compares the amount of income and donations to see if they are mutually agreeable.
  • Business partners and family members being audited.

There are three types of audits that the IRS conducts.

A correspondence audit is more common and done entirely by mail. They will have a form that an individual will fill out. It will ask common questions about income, expenses, and itemized deductions.

A field audit is when an IRS agent visits an individual at the home or business. This audit typically requires in depth record keeping as the IRS will want to inspect them and make sure they match the numbers reported.

An office audit is when the IRS requests a person to take records and paperwork to the closest office. This is done as a formal way to inspect records and paperwork without needing to send a field agent to your home or business.

If a person is being audited, it is imperative to respond to the IRS letters by the deadline given on the notices. The IRS may consider an extension during this time, but they are far less likely to be so considerate once the time period has passed.

It’s also important for a person being audited to have copies of documents and records at the ready. Having copies means that the originals aren’t lost or destroyed during the audit process. We also recommended, if you’re being audited, to be represented by a tax attorney or CPA for protection.

Receiving an audit letter or phone call is stressful, but understanding how the process works can help make it a smoother transition back to normal.