Your IRS & State Tax Return Audit
Are you playing the IRS audit lottery?
Before reading any further – IN A HURRY? Then you might contact us right away.
Or if timing is super-critical, sign up right now to ask us to be your advocate in front of the IRS.
There are several levels of IRS inquiries and examinations (audits)
Letter LTR 5071C Identity Theft / Identity Verification inquiry.
See the related website idverify.irs.gov
Also see Taxpayer Guide to Identity Theft and IRS Form 14039
Computer Paragraph CP2000 Underreported Income Notice and CP2501 Correspondence Matters
(These notifications are not evidence of an audit or examination. Rather they are just a proposed tax adjustment based only on an under-reporting of income obtained from Forms 1099 or other income reporting documents. A statutory notice has to be issued before the adjustment is made but an IRS supervisor does not have to sign off on the 20% negligence penalty. The additional tax is posted as a “Tax Adjustment” using IRS computer code 290, not as a tax deficiency using IRS computer code 300. As a practical matter, CP2000 adjustments do get treated as an examination.)
CP566 Correspondence Examination (internally referred to as the first 30-day letter or an ICL, Initial Contact Letter)
Letter 525 General 30 Day Letter (the “bad news” that the IRS now wants to assess additional tax and you have 30 days to file an appeal)
U.S. Marshals and Criminal Investigations and Arrests (do not contact us, rather immediately contact a lawyer and then have your lawyer contact us)
After the IRS has determined that there is a problem
Other IRS Letters and Notices Offering an Appeal Opportunity
After opportunity for a normal appeal has ended:
Letter CP531 (Statutory Notice of Deficiency, 90 day letter – you have only 90 days remaining to file a petition in U.S. Tax Court to argue against the IRS’s proposed changes to your tax return)
Letter CP3219 (Notice of Deficiency, 90 day letter – you have only 90 days remaining to file a petition in U.S. Tax Court to argue against the IRS’s proposed changes to your tax return)
During the 90 days “audit reconsideration” can be invoked by the CPA to try to short-circuit a trip to petitioning the U.S. Tax Court
Fillable PDF Petition to the U.S. Tax Court (strictly due within 90 days of the CP3219)
At which point the court generally will kick it back to IRS appeals for one last opportunity for your CPA to argue the case before you need to retain a tax lawyer and go to trial (or if losing at appeals, just give in and pay the IRS assessment)
I observe that the majority of cases going to appeals are settled right there, one way or the other; and the majority of cases going forward to trial after an unsuccessful appeal, result in a win for the IRS (especially with pro se cases)
IRS agents represent the interest of our government. They are not there to help you, even if the revenue agent should state otherwise. The IRS’s definition of having their examination agents “helping” taxpayers is not what most taxpayers consider “help.”
The IRS has declared “war” on sloppy record-keeping day traders and they are ramping up field audits and office audits of daytrader’s tax returns.
With support from the National Office the IRS has at their disposal the means to attack from years of Tax Court cases won by the IRS. Often it is the “helpful innocent admissions” by taxpayers in the first communications with the IRS that peg-hole them as “tax abusers” and your case is lost even before you even start!
Warning / Caution: Do not speak to the Internal Revenue Service. Eventually it could cost you more than you might ever realize might be possible at the time. Doing a tax return by yourself is one thing… trying to respond to a direct IRS inquiry is totally different.
You will not be helping yourself. You will not be saving yourself trouble in the long run. You will not be making the job easier or any less expensive for your professional representative (CPA, Tax Attorney, etc.) by “helping out” and “just talking” with the IRS to see what they want. You will actually be making your representation more difficult and the professional fees to lay out a proper representation on your behalf will be higher.
IRS webpage – What is an IRS audit?
Why retain us to handle all of your IRS inquiries?
IRS controversy issues, tax return audits and even routine IRS and State inquiries sent by the U.S. mail are best handled by a professional CPA firm, rather than going it alone and risking “putting your foot in your mouth.”
Taxpayers signing a special IRS limited Power of Attorney may retain us to represent them with many of these issues. Be advised: Quite often it is more prudent to contact us before you contact the IRS in response to an imposing inquiry.
Why use TraderStatus.com for your trader tax advisor?
TraderStatus.com is the Web Site presence of Colin M. Cody, CPA, CMA. Colin advises Security Traders and CPAs across the country regarding complex trader status issues. Colin has been advising Security Traders on the Internet since 1991.
Colin M. Cody, CPA, CMA has been instrumental in the authorship of the actual and forthcoming securities trader Tax Code by working with the drafters of the IRS Code while interpreting the intent of the US Congress when they pass the law.
Audits?
Audits are handled for taxpayers in any of the U.S. States either by communicating with the IRS examiners via telephone, fax and mail or by transferring your case to Connecticut for face-to-face meetings with the IRS examiners and appeals officers.
More often than not Colin finds errors in the preparation of the tax returns selected for audit. The errors made on self-prepared tax filings are responsible for initiating some audit inquiries. Errors we find on professionally prepared returns are usually only found after a thorough review of your paperwork back in our offices and sometimes these have quite severe misinterpretations of the law.
It is not uncommon for us to find that taxpayers have overpaid their taxes in prior years because regular tax rules were used rather than the proper Trader Status allowances.
Corrections?
If correction of any errors will favor the taxpayer because your taxes were overpaid, then we may prepare proforma drafts of amended tax filings to present to the IRS examiner during the audit. If the correction of any errors will favor the IRS because your taxes were underpaid, then we can prepare for the possibility that the IRS examiner will also find those same mistakes.
Click here if you are ready to retain us for your audit representation.
Have YOU been contacted by the IRS?
If you have already been contacted by the Internal Revenue Service about your Trader Status filing or your Mark-to-Market election, it is generally a good idea to immediately obtain professional representation before answering any questions or providing any information to the Internal Revenue. Providing “the wrong” information a/k/a “putting foot in one’s mouth” can cause irreparable damage to your situation.
Once you are selected for audit, do not make the mistake thinking that you merely need to provide your trading details and some other documentation to the IRS with a smile. The IRS examiner will likely not have a clue what “Trader Status” is, and will disallow the tax benefits taken on the tax return.
If you are contacted by the IRS you need representation. If you need representation please download IRS Form 2848 “Declaration of Representative” fill it out as best you can and sign it. Then see IRS Audit Representation for our retainer fee information and What’s needed to get started for other information to get together.
Don’t be lulled into complacency. The longer you procrastinate, the worse it will get. Taxpayers have numerous options available to their defense at the initiation of an audit inquiry. The “doors” to these options start closing one-by-one as you delay in obtaining professional representation. As the doors close you begin digging a deep hole that will be more difficult to crawl out of. The costs to you in taxes and penalties and in professional fees rise as each door closes.
Whether you use us for audit representation or not, we implore you to immediately get out of the line of fire and retain a CPA, a tax attorney or other tax professional to represent you. Most taxpayers are likely to be causing their case irreparable damage the longer they wait.
IRS Audit selection and planning – the IRS Manual tells agents how to spot improper pastime deductions.
The latest “audit technique guide” covers the application of what is known informally as the “hobby-loss rule.” This is the Internal Revenue Code provision–Section 183–that prohibits taxpayers from reducing their taxable income through losses generated from activities…
The hobby-loss rule comes into play primarily when a taxpayer claims a loss on his tax return’s Schedule C for a questionable activity and that loss is then used to offset other taxable income–like from a day job or from passive investments. What can draw the most IRS scrutiny are claims of big losses for several years in a row.
The manual suggests that agents attempt an end-run around a CPA or other tax adviser that a taxpayer might bring to an audit interview. “Direct the questions to the taxpayer,” it states.
Higher profile occupations include:
| Fishing | Horse Racing |
| Bowling | Farming |
| Motorcross Racing | Auto Racing |
| Craft Sales | Professional Gamblers |
| Fishing | Dog Breeding |
| Yacht Charter | Artists |
| Photography | Stamp Collecting |
| Direct Sales | Horse Breeding |
| Writing | Entertainers |
| Airplane Charter | Rentals |
Forbes – IRS Seeking To Tax Your Hobby (for tax years before 2018)
Click here to learn from the “horror stories.”
IRS examination targets:
- most resources will go to their Small Business / Self-Employed Division [SB/SE]
- targeting in order of priority:
- ○ tax avoidance transactions
- ○ high-income / high risk taxpayers
- ○ high-income non-filers
- ○ unreported income cases
- ○ corporations
- ○ S corporations
- ○ partnerships
Other IRS letters
Understanding Your IRS Notice or Letter.
Letter LTR 1962C Installment Payment Agreement.
Letter CP282 Foreign partner reporting.
Website listing additional IRS Computer Paragraphs Notices and transcripts
Website listing various IRS letters