IRS Audit: The Tax Audit Process
Every year, thousand's of taxpayers receive notices from the IRS asking for more information, money, or both. If you've never experienced this, consider yourself lucky, or better yet smart. If you file your forms properly, pay your taxes in full and on time, and keep good records, you have nothing to fear from the IRS. But if you don't (or if you play games with the numbers), expect a call, knock, or god forbid a summons from the IRS.
What it will do
The IRS will generally take 4 steps if it feels it needs to become a little more intimate with you. The first thing it will do is mail you Publication 594 (entitled the IRS Collection Process) along with a past-due bill. Depending on your temperament, time, and energy levels, it may be best for you to just pay your assessed tax.
But if you choose not to, or if you feel you don't have to, the IRS will attempt to contact you via telephone. At this point, most taxpayers cooperate. If you go with the flow, you will get that 900 lb. gorilla off your back and the IRS will get its money. The case will then be closed and you can look forward to next tax season.
But if you do not comply, or if you won't pay, the IRS will assign a revenue officer to clean up your account. And No, these guys and gals aren't like Will Smith in 7 Pounds. They are not conflicted and, while they may show empathy, they are trained for a single purpose, and that is to collect data and or money. If it gets this far, I'm sure you will be more than a little stressed. (This is what people call an audit.)
When all the pleasantries have been exchanged, the agent has come and gone, and the final amount tallied, you are expected to pay. If you refuse, the IRS will then take an enforced collection action to get the amount due. If generally does this in three ways and none of them are pretty.
You've been summoned
The IRS uses a summons to get you (or your accountant) to give up documents, information, or even testimony to help it redetermine your tax debt. It's sort of like a subpoena for a witness. If you are served a summons, you best comply, because if you don't the IRS could file additional legal action against you. Things like an enforcement suit, a contempt order, or event a contempt hearing would make for a rough day.
Liens are bad
If after that it's decided that you still owe, the IRS could file a notice of Federal tax lien against your property. This makes a legal claim against your house, car, etc. to serve as collateral toward the payment of your tax debt. You should expect to see a lien 10 days after the IRS sends you a Notice and Demand for Payment. Once the lien is served, it attaches itself to your property, your rights to the property, and any property you acquire after the original lien is filed. Ouch!
Once the IRS slaps a lien on you, your creditors are publicly informed that they no longer have rights to your stuff. And when your creditors no longer have rights to your stuff, they respond by damaging your credit. Often a lien from the IRS will make it nearly impossible to buy any big-ticket item with anything other than cash.
Levies are worse
Simply put, liens are nothing compared to levies. Basically, a levy is a legal seizure of your stuff to satisfy your tax debt. The difference between a levy and a lien is that a lien is just a claim against your stuff, while a levy actually takes (and sells) your stuff. And by stuff, I mean your house, car, retirement accounts, dividend payments, rental income, value of your life insurance, and/or wages. If it has value, the IRS has the power to take it.
The levy will come if you have already received a Notice and Demand for Payment and neglected to pay your tax liability. The IRS will then send you a Final Notice of Intent to Levy at least 30 days before shit hits the fan. Usually, a levy is delivered in a bunch of ways: by hand, by certified mail, or where you work. Call me crazy, but the last thing I would want is for an IRS agent to deliver a levy at my place of employment. Wait, didn't that happen in an episode of Office?
Fin
Fighting with the IRS is a risky proposition, one that carries ugly consequences. You do not want the IRS to come looking for you. If you raise the ire of this agency, you will want to cooperate and you will want to pay. If you do not comply, the IRS will (one way or another) get its money. So what's the moral to the story? Simply, pay your taxes and pay them on time to avoid an audit.
