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Victim of a Practice Audit

Audit Word Ball Anxiety Fear Tax Financial Accounting PracticesOver at Instapundit, I read yesterday that the IRS defended its Breitbart audit with this statement: “The IRS stresses that audits are based on the information related to tax returns and the underlying tax law — nothing else.”

Glenn aptly writes “And who could hear this without laughing?” Actually, I know from personal experience it is false, because a while back I was subject to a “practice audit.”

It began with a notice that I was being audited for my charitable contributions. This was puzzling as my contributions were entirely in cash. To be sure, I was ashamed that they were pitifully low that year, but this made the audit all the more curious.

Dutifully, I trekked up from the South Side to the federal building in downtown Chicago, and my accountant came in from out of state! Yes, I pay an accountant for my small scale taxes, but read on, and see why he is worth every penny.

He and I waited patiently at the appointed time, and waited, and waited. Did they forget the audit? No. Eventually, a guy came out, who said he was the head of the office and invited us into a little room. As he brought us in, he explained that the woman who was meant to conduct the audit had failed to come that day.

Mentally, I was annoyed. But both my accountant and I remained very polite. We merely thanked him for taking care of the audit.

Into the little office we crowded: the IRS guy behind the desk, and we in chairs opposite him. He asked some perfunctory questions and then turned to my charitable contributions. He looked at my embarrassingly low contributions, he examined my proof of having made them, and then seemed to weigh some profound question of tax law. The moment of truth had arrived.

At this point, however, I could not help myself. Being a former tax lawyer, but now being merely a client, I foolishly asked the idiotically simple question that had been bugging me all along: “Why am I being audited for cash contributions?”

The IRS man looked at us. Then, calmly and without discomfort, said, “It is a practice audit.”

Instinctively, I leaned forward and exclaimed, “WH . . . .” I never finished. My accountant, a well-built guy, was a step ahead of me. I felt his left arm pushing me back into my seat, while he said, “Thank you for sharing that. I assume then that this matter is closed.” The IRS man promptly agreed and that was that.

Of course, I was not going to hit the IRS guy. I was only going to ask what the hell a practice audit is? What did the IRS think it was doing in practicing on me–in dragging me and my accountant to an audit that had no other purpose than to train an IRS employee who did not even turn up!

But curiosity, anger, and pushback are not advisable when dealing with the IRS. My accountant was wiser than I was, and I am forever grateful. But I also am grateful for the opportunity finally to tell this story. Let’s see if I get audited for it!

Reader Discussion

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on September 11, 2014 at 13:39:04 pm

That is why they keep getting away with it. We are at the time when we need to fight back. They are a criminal organization and should be treated as such and the employees should fear us

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Joe Keener
on September 11, 2014 at 14:37:08 pm

They seem to be doing practice SWAT raids and practice wiretapping too.

What next - practice executions?

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Whitehall
on September 11, 2014 at 18:23:54 pm

As a practicing CPA - just about half the audits I am invoived with are practice audits.
One example of the brain power of the IRS was an exam with mid level IRS agent (approximately 15 years of experiance). The agent wanted to exam one particular type of expense. I explained to her that due to the intereaction of alternative minimum tax, the tax liability was the same with and without the deduction. She not only insisted on conducting the audit, (she could not comprehend AMT even with 15 years of experience), she made multitutes of math errors in recomputing the tax.

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A tax CPA
on September 11, 2014 at 21:10:26 pm

A few years ago I served on a jury. It was a misdemeanor case and the prosecutor was very young. You could tell he was inexperienced. There was a man who sat in the courtroom observing and would consult with the prosecutor during breaks. You could tell he was a supervisor trying to mentor a new prosecutor. Anyway, the case was a mess. It was presented horribly. There was very little evidence. Everyone on the jury wondered why this case was even brought to trial and were quite upset about having their lives disrupted for this nonsense. We elected a foreman, voted not guilty. We were in the jury room about ten minutes. To this day I can't shake the feeling that this whole case was brought to trial, and the jury and defendant put through this ordeal, just for the purpose of giving a young prosecutor some practice.

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Mark1971
on September 12, 2014 at 09:35:27 am

I recall a man loudly telling those in the IRS office that were within earshot:

"Someday it will not matter whether you were a Good IRS agent or a Bad IRS agent.
It will be sufficient that you simply were or are an IRS agent"

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George Dixon
on September 12, 2014 at 10:03:43 am

Thanks for sharing your story, Phil. Just about any interaction with the IRS involves killing at least a tiny part of your humanity. As a practitioner, I've seen other instances where much more has been destroyed.

But the other part of the statement from the IRS' press release --- the "IRS is staffed by non-partisan employees."

This is vile premise. Never mind, the obvious facts of were most political donations go. That's not my point.
But rather, some people find that a personal income tax is completely at odds with any idea of a limited federal government. When we compare its stated goals with 101-year record, the 16th Amendment is a complete failure. It was passed on a pack of lies, sold on greed. Yet it has harmed just about everyone it touches. It was never quite able to deliver the utopia it promised, and in fact, has turned or civil liberties into the government's slave.

We can have a tax on personal income or we can have limited government whose purpose is to protect individual liberty. But we can't have both.

So some of us, well some us, we want the IRS to be as powerful as it was in 1912. Yet, any employee at the IRS probably doesn't agree. So you see. There is a political difference. A huge difference. Therefore, they are, like I am, partisan. So it is completely disingenuous for them to slap out such an intellectually offensive press release; it's time to call them out on it.

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Anthony E. Parent, Esq
on September 12, 2014 at 10:34:04 am

About 10 years ago, I was a brand-new revenue agent in what's now LB&I (taxpayers with assets of 10M or more), albeit with many years of tax experience. Yes, I was assigned to complete three "practice audits." How these particularly taxpayers were determined, I have no idea. They were probably going to be audited anyway. "Practice audit," in LB&I anyway, means the agent's supervisor will closely watch how the audit is going.

In my practice audits, I proposed adjustments which all three taxpayers agreed to. In one case, the taxpayer had totally screwed up its LIFO inventory. The taxpayer fired the original accountant and brought in another accountant who understood the industry. We quickly resolved the issue in the years under audit and going forward.

In my experience, almost all agents I've met in LB&I want to simply follow the law. I'd recommend you focus your ire on the Lois Lerners of the world (and her supervisors) who seek to destroy enemies of the regime, not just do their job.

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Elmer Stoup
on September 12, 2014 at 13:55:21 pm

A question for any tax lawyers or practitioners out there, because I'm just curious - what section of the Internal Revenue Code authorizes practice audits?

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Belial Issimo
on September 12, 2014 at 19:45:45 pm

People like Stoup are part of the problem. He participated, so it must be okay.

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David
on September 13, 2014 at 10:57:31 am

Practice audit? You mean fishing expedition. Once the Income Tax (which is the 2nd Plank of the Communist Manifesto) became "law" that was the beginning of the end of the American Republic. The Income Tax,the Federal Reserve Bank and the Legal Tender Laws are the monetary triumvirate that has facilitated the fiscal growth of the American welfare/warfare state empire. These 3 entities added together have turned productive Americans from independent sovereign citizens into tax serfs. The sad part of the story is that the average productive citizen doesn't even realize how or why they came into this situation.

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libertarian jerry
on September 13, 2014 at 15:47:26 pm

First, 26 U.S.C. 7601 authorizes and requires the Commissioner to cause internal revenue agents to inquire after all persons who may be liable for any tax under the IRC. Translated into English, that means there is no requirement of probable cause or anything like it as the basis for an audit. So, assuming there is such a thing as a "practice audit," an audit conducted to give an agent "practice" certainly would be authorized under sec. 7601. Second, I have read this article and the comments with considerable skepticism. I represented the IRS in federal district court for just over 30 years. I never heard of such a thing as a "practice audit." The term makes no sense in the scheme of things. There need be no reason for an audit, and many audits were and are done on a random basis. The old "TCMP audit" was outlawed by Congress in the 90s. TCMP audits--taxpayer compliance measurement program--audits were done principally to construct a data base from which to mathematically compile an audit "score," which was used to select returns for audit. The higher the score, the more likely the return contained an error or fraud. Because the TCMP was outlawed, the IRS had to abandon the audits, because the data base became outdated and less accurate in predicting fertile auditing. Third, any audit, random, scored, targeted, "practice," or otherwise, that turns up an error, discrepancy, or fraud will result in adjustments. Fourth, any audit can end in "no change" or an overpayment for the; taxpayer. The goal of an audit is to determine the correct amount of tax due. So let me be plain--I think this whole story is a lot of hooey.

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Publius Novus
on September 14, 2014 at 18:20:56 pm

When Publius Novius say that whole story is "a lot of hooey," are you claming that Philip Hamburger is outright lying about IRS's conduct? What about all the other IRS horror stories we hear? Also buy liars? What about the testimony by former IRS agents as to their practices, conduct and motives? Also lies?

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David
on September 16, 2014 at 01:19:59 am

I hate typos. "By liars" is what I meant, obviously.

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David
on September 16, 2014 at 04:24:30 am

[…] the so-called “practice” audit, to which blogger Philip Hamburger was once […]

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Common Sense with Paul Jacob » Archive » Death But No Taxes

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.