Tax Horror Stories That Will Make You Fear the IRS
Nightmare Files
In the best-case scenario, filing your taxes is monotonous yet painless, resulting in a modest return. In the worst-case, it can become a bureaucratic nightmare, resulting in increased payments and an IRS audit that might turn your financial life upside-down. In time for a new tax season, this list runs down just a few of the personal nightmares as well as institutional scandals that seem to continually plague both the IRS and the taxpayers from whom they collect.
Related: 20 Crazy-Sounding Tax Deductions That Are Actually Legit
An Inexperienced Agent Leads to Audit
Early on in filing her taxes, Courtney Keene tried to cut costs by foregoing a certified public accountant (CPA) in favor of a freelance enrolled agent (EA). “I've had better experiences with EAs since, but this one was an absolute nightmare,” says Keene, a self-employed director of operations at the online contractor marketplace MyRoofingPal. Because this EA didn’t understand the sources of her income nor the tax industry itself, they filed incorrectly, apparently cutting her tax liability by about $6,000. When the IRS audited her, she had to pay the $6,000 plus fees totaling an additional $5,000.
Related: Special 2022 State Payments Not Subject to Federal Tax, IRS Says
An Illegal Filing Ends Badly
Eileen Maki, a tax and accounting analyst at New York’s FitSmallBusiness.com, recalls witnessing how one would-be client’s determination to file incorrectly — and illegally — backfired. When a married couple came to her old desk at H&R Block, Barry, the husband, insisted she file their taxes separately, with his return as Head of Household and his wife Cara’s as single. When Maki explained she couldn’t do that because they were legally married, Barry became irate, saying his sister had done it, hurling an empty baby carrier across the office at the window.
Months later, a colleague informed her that the couple had gone to another tax filing office that fulfilled their request to file separately. “When they were notified they'd be audited, they falsely claimed I had prepared their taxes,” Maki relates. Several months after clarifying this was not the case, she came across a picture of Barry in the morning newspaper. “He'd been sentenced to 5 years in jail for Federal Tax Fraud and Falsification of Audit Documents.”
Related: Places Where the Rich Hide Money From the IRS
An IRS Mistake Makes Results in a 5-Year “Nightmare Audit”
Bostonian Paul Hatz endured a five-year audit over the liability of his C corporation. To start, he was served with a $110,000 personal tax lien, allegedly because the auditor miscategorized money he’d invested into the corporation as income. He incurred $60,000 in attorney and CPA costs fighting the fine and was forced to shutter his small business, which had employed more than a dozen people. He’s since tried to appeal the results on grounds that the IRS never sent out the proper statutory notices of deficiency, denying him the right to challenge his auditor’s claims.
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A Disgruntled Former Employee Takes Revenge
Charles J. Read, a CPA and president of small business services bureau GetPayroll, gives presentations on tax preparation and the travails that can occur when something goes wrong. In one anecdote, an ex-employee falsely accused Read’s client of skimming the register and under-reporting income, setting off an IRS investigation. At their insistence, GetPayroll provided accounting records going back 10 years or more.
The client hired a lawyer costing them almost $100,000 before the IRS finally dropped the unsubstantiated investigation without findings after two years. “I didn’t bill my client after all they’ve been through,” Read relates. “I could not bring myself to do it.”
A Widow Pays for Her Late Husband’s Mistaken L.L.C.
In 2006, Michigan resident Majit Rochlani launched a side business buying and selling tickets called Ultimate Presales, intended as a sole proprietorship to be reported on form 1040. Rochlani’s son, however, used an online legal service to incorporate it as a corporation, without his parents’ permission or knowledge.
When they filed their losses from the business in 2008 and 2009, the IRS issued a bill for unpaid taxes in 2010, disallowing their deductions since Ultimate Presales was now a separate incorporated taxpayer. Rochlani would pass away before the case could make it to Tax Court, which consistently rejected their claim that the mistaken incorporation should be disregarded, increasing their tax liability by more than $12,000 for the two years in question.
An Audited Couple Incurs an IRS Agent’s Wrath
According to the IRS itself, Tim and Tracey Kerin endured a “hellish ordeal” when their CPA’s improper listing of company expenses trigged an audit. The Kerins contacted the Taxpayer Advocate Service (TAS), an independent office within the IRS to ensure taxpayers’ fair treatment, which backfired to say the least. “By us doing this we upset the IRS agent so she put the screws to us even harder and ignored the TAS,” said Tim. “Our civil rights are now gone." They argued their case to the Deputy Chief Council of the House Small Business Committee, alleging the agent had fabricated findings because she didn’t have time to review their nearly 4,000 pages of provided documents. They’d go on to spend more than 30 months and $95,000 in accounting and legal fees to defend their company against an expense audit.
An Entrepreneur Gets a Big Year-End Tax Bill
As owner of his own eBay store, John Frigo — now digital marketing lead for MySupplementStore.com — was aware he could file quarterly estimates for taxes, but never saw the need in his first few years of small-time business and payments. When sales took off one year, he still put off filing until 10 p.m. the night before Tax Day, at which point his accountant found he owed $27,000. Luckily, he had saved enough that it didn’t throw him into debt, but it still served as a wake-up call and reminder or how easily one could get in trouble with the right amount of carelessness and lifestyle inflation.
A Nail Salon Is Nearly Lost Due to Misclassified Employees
Jade Phuong nearly lost her nail salon to an audit when the IRS took issue with her past three years’ returns classifying her salon workers as independent contractors — based on consultations with a CPA upon opening. The auditor alleged they should be classified as employees, meaning Phuong would now owe $85,000 in back taxes. Her options were to appeal the case to Tax Court, which could cost thousands in legal fees on top of the IRS’ charge if she lost, or agree to convert her workers to fully-insured employees now in exchange for a reduced liability. Phuong opted for the latter, so her debt to the IRS plummeted to just $20,000.
A Missed Audit Memo Disrupts Spinal Surgery
Philadelphia-based artist Joan Smith’s spinal surgery had to be postponed in 2010 when the IRS imposed a lien of $10,000, more than she had in her bank account. It turned out her write-offs of a couple thousand dollars in working for a nonprofit organization had triggered an audit, but she had missed the notice that had been sent to her former address. Instead of spinal surgery, she’d spend the next 11 months hunched over file drawers and sorting through paperwork. Despite the strain on Smith’s back and her time, her audit had something of a happy ending, as the IRS eventually found she was owed $587 for her 2003 return.
A Wrong Date Wastes Hours
CPA George Birrell of Taxhub relates that one of his client’s 1120-S filing for an S corporation had an error, listing the end date at 2/23/17 instead of 12/31/17. The IRS demanded the return be amended, but as the error had no impact on tax liability, Taxhub superseded the return. “The IRS could not figure out that the only difference was the period end date and after 6 months and 3 more attempts to send the correct return they finally acknowledged the correct period end date,” explains Birrell. Thankfully for the client, the mistake didn’t end up costing any money — just 10 or more hours of back and forth to clarify.
IRS Incompetence Costs Dearly
According to a source who requested to remain anonymous, the IRS alleged he owed $3,000 in taxes he had already paid. Despite having proof his check for $3,000 had already been cashed, the annoyed IRS agent “played judge, jury, and executioner,” using circular logic to insist “that I owed the amount because the line on [his] screen said I did.”
His accountant advised that he should pay the $3,000 anyway, or risk being penalized and charged even more for contesting the mistake. “He explained that sometimes the people who work for the IRS don't even have a basic understanding of the tax code or even bookkeeping,” the source relates. “I tried to explain to my tearful wife what had happened and she literally said, ‘But this is America!’”
A Missed Reply Ends in Disaster
According to Ethan Taub, CEO of financial institutions Goalry and Loanry, an anonymous client was so used to having employers take care of taxes that he neglected to keep track of revenues after starting his own business. When the IRS hit him with a huge bill, he sent a delay request to get his finances in order. Not only did the IRS reject his request, but since the client had moved premises, their reply was sent to an old business address. “He ended up with a massive fine in addition to the lateness,” says Taub. “A disaster.”
A Fire Leads to Tax Court
After their Connecticut summer home burned down in 1985, freelance writer Joan Barthel and her husband claimed a tax deduction the next year. Both were shocked when two IRS agents arrived at their Manhattan apartment “like storm troopers,” alleging they had filed incorrectly and now owed $14,000.
“They came in assuming I was a criminal and had deliberately tried to cheat the United States government,” Barthel said. “It was ‘guilty until proven innocent.’” The agents reportedly demanded every last detail of what they’d lost in the fire and added interest charges to the couple’s alleged debt. They lawyered up for tax court, but the case went on for so long they accumulated an additional $2,000 in interest, eventually settling for $4,000 total.
Unanticipated Taxes Lead to Severe Emotional Distress
Financial issues, including those occasioned by an IRS audit, often serve as a powerful trigger worsening stress or other preexisting mental health issues. As such, the IRS has been sued multiple times for wrongful death due to the emotional distress their raids have caused. Indeed, California CPA Melody Thornton told Reuters in 2014 that she had to calm a young woman after learning she’d made a mistake on her withholding and now owed more than anticipated in taxes.
An Account Is Seized for Dealing in Cash
In 2016, Maryland dairy farmer Randy Sowers was targeted by the IRS for suspicion that he’d engaged in a federal crime called structuring, or intentionally banking in cash amounts under $10,000 to avoid reporting the transactions as required by law. Because he sold milk for cash at farmer’s markets and had small but frequent bank deposits, the IRS presumed Sowers’ guilt and seized his account, worth more than $60,000.
Between 2005 and 2012, the agency seized more than $242 million for such structuring violations, for one third of which they reported no suspected criminal activity. Faced with exorbitant legal fees and a grand jury subpoena implying the prospect of jail time, Sowers was forced to negotiate a lower forfeiture amount of $29,500. Thanks to media scrutiny and the advocacy of the Institute for Justice, the federal government later agreed to reimburse him.
A Whistleblower Is Unjustly Audited
Former Federal Air Marshal and whistleblower P. Jeffrey Black was audited by the IRS the same day a documentary in which he was featured criticizing airline security measures premiered. Suspecting foul play amidst the 2013 scandal about the agency singling out Tea Party groups applying for tax-exempt status, Black was subjected to a yearlong investigation and a $24,000 lien against his home. When the IRS concluded he owed them only $480 and they owed him $8,300, Black paid his dues while the government defaulted, saying the statute of limitations had run out.
Taxpayers’ Data Gets Mishandled
While media outlets and even Congress now regularly critique private companies like Facebook’s carelessness with users’ data, federal agencies like the IRS, with whom Americans have little choice but to comply, aren’t doing much better. Reason lists a few notable examples of the IRS’ misuse of taxpayer data, such as when former agent Ryan Payne pleaded guilty to using other people’s Social Security numbers to apply for his own loan and bank account; when hackers extracted info on nearly 100,000 college students through the IRS Data Retrieval Tool and stole upwards of $30 million in 2017; or when the agency admitted to paying $5.8 billion of fraudulent refunds in 2013 due to identity theft.
Related: 9 Common Tax Mistakes Retirees Make
The IRS Rehires Problem Employees
The IRS can also get careless with who it employs, which is bad news for taxpayers whose fate often depends on the discretion of a single auditor. In 2015, Reuters reported that the agency’s poor screening protocols led them to rehire hundreds of former employees with records of bad behavior, including falsifying forms, granting unauthorized access to private info, and engaging in threats and sexual harassment.
An IRS Agent Abuses Position for $20,000
In 2009, IRS revenue officer Mark Claybrooks was indicted by a federal grand jury for encouraging taxpayers in debt to refinance with Faith Mortgage Group, a mortgage company with whom he was also employed. In exchange for the abuse of his government position, Claybrooks received more than $20,000 for the referrals. According to SF Gate, he was charged with three counts of ”acts affecting a personal financial interest” as well as two for using IRS computers without authorization
IRS Bungling Forces a Divorce
In 1997, a number of taxpayers converged on a hearing of the Senate Finance Committee to share their stories of mistreatment and abuse by the IRS, including Californian Katherine Lund. Lund related that the agency repeatedly threatened to seize her home if she did not pay a tax debt of $7,000 from her previous marriage. She tried to pay the IRS three times, only to be refunded with the assertion she didn’t owe anything — then pestered about it by another branch once more. When the IRS then went after her next husband’s attorney pay, the couple divorced just to protect his finances. The error was caused by an inconsistency between the agency’s noncomputerized records and master computer file, which was only corrected after the case came before the Senate committee.
Budget Cuts Hobble IRS Effectiveness
While it’s clear that the IRS has more than its fair share of problems, a mounting lack of resources, both human and financial, have done little to help matters. Funding was slashed by more than $1.2 billion between fiscal years 2010 and 2015, a total reduction of 17% by 2017, with more than double the remaining budget devoted to enforcement than to taxpayer services. As a result, in the 2015 filing season, phone calls dropped by the IRS switchboard increased to more than 8 million (compared to 544,000 the year before), so those taxpayers facing issues with their returns often had to go without assistance.
Scammers Pose as IRS Agents
The IRS may be frightening to go up against, but even worse can be falling victim to scammers posing as IRS agents. Fraudsters routinely take advantage of the fear and ignorance most people have of their own tax code to trick them into forking over their cash or account information, using idle threats of federal recrimination and police knocking down your door. It’s prudent to remember that the IRS never initially reaches out via telephone, email, text messages, or social media. They will also never involve local police or request personal information over the phone or via email. If you suspect you’re being scammed, report to the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484 or www.tigta.gov.
Related: The Biggest Phone Scams and How to Avoid Them
The IRS Taxes the Poor, Bypasses the Rich
As the IRS’ declining budget and retiring workforce has hobbled their ability to provide taxpayer assistance, richer Americans have enjoyed the spoils while poorer Americans disproportionately shoulder the burdens. According to a 2019 report by ProPublica, millionaires were 80% less likely to be audited in 2018 than in 2011, while taxpayers receiving the earned income tax credit (EITC), who have a median income under $20,000, are audited at a higher rate than all but the top 1% of earners. Sen. Ron Wyden (D-Ore.) summed up the inequitable disparity, saying, “While the wealthy now have an open invitation to cheat, low-income taxpayers are receiving heightened scrutiny because they can be audited far more easily. All it takes is a letter instead of a team of investigators and lawyers.”
Related: Here's How Long You Should Keep Your Tax Returns and Why
