The IRS relies on fear of audits to make sure people pay their taxes; if you turn that fear on its head, you better believe the IRS would be left completely bewildered.
The IRS does in fact, allow certain taxpayers the chance to be audited with something called a Pre-Filing Agreement Program. For better or for worse (better for the IRS, worse for the taxpayer), this program is not available to the vast majority of taxpayers. Therefore, I consider it my civic duty to explain why this unfair treatment should not be tolerated!
What is the IRS Pre-Filing Agreement Program?
First we have to talk about the Large Business & International Division of the IRS. These are the people who handle the most complicated tax issues. They are known in the business as LB&I. Unofficially, LB&I consider themselves to be the cool kids lunch table, while the IRS's official website downplays their self-proclaimed social standing:
"The Division serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million. These entities typically have large numbers of employees, deal with complicated issues involving tax law and accounting principles, and conduct their operations in an expanding global environment."
So how does LB&I relate to the topic at hand? Well, the Pre-Filing Agreement Program (PFA) was designed to help large businesses and international — or global — taxpayers with a high net worth deal with LB&I prior to filing a tax return. Specifically, their role works in the following ways:
- Taxpayers are able to get an answer on a proposed tax treatment prior to actually engaging in the transaction, so the taxpayer would know the actual cost of any transaction, including their tax burden.
- Make sure proper taxes are paid to the US Treasury in order to avoid any under-reporting/underpayment penalties if a tax treatment is later disallowed in a future examination.
They make sure you don't end up with an overwhelming collection of tax bills, penalties, and interest. Sounds really nice, doesn't it? Well, LB&I claims that the PFA isn't really an audit:
"is considered an inspection of a taxpayer's books and records for the purpose of arriving at the tax treatment of the PFA issue on a return that has yet to be filed… Although not an audit, the examination team is required to apply the same type of auditing techniques and adhere to established auditing standards to arrive at their conclusions on the PFA issue."
So yeah, it's an audit.
Why can some taxpayers request an audit and others can't?
This is what everyone wants to know, but somehow no one seems to have a solid answer. All the tax lawyers, CPAs, and IRS agents you ask can come up with different responses, but none of them are satisfactory. And the IRS even admits it:
"encourages taxpayers to request consideration of an issue before the tax return is filed and thus, resolve potential disputes and controversy earlier in the examination process. The effect of the program is to reduce the cost and burden associated with the post-filing examination, to provide a desired level of certainty regarding a transaction and to make better use of taxpayer and IRS resources. Below are materials which further describe the PFA process, what is required and information concerning the results achieved."
Certain taxpayers can, and will, happily pay the $50,000 user fee (!) to enter into the PFA Program and know that they will be safe from future problems. Unfortunately, there is a wild degree of uncertainty as to who is actually eligible.
Why the discrimination against small and medium taxpayers?
If a US-based business has less than $10,000,000 in assets, is the IRS actually saying that they shouldn't be allowed some certainty? Meanwhile, doesn't it seem that preference is being given to large companies with significantly more resources to deal with the IRS? Somehow, it seems like the IRS is giving a pass to those who can actually fight while setting their targets on the people they can break. When you have vast resources, dealing with the IRS isn't quite as daunting. While income tax problems for medium and smaller taxpayers may not be in the millions like bigger taxpayers, they are often far more crippling in relation to the taxpayer's financial means. I don't care what the IRS says, that's some incredibly unfair conduct.
# # #
