Independent Contractor Compliance Blog - by Collabrus™

In my continuing series on things employment tax auditors likely won’t tell you, today I’m going to discuss statements you can make to the Tax Auditor which guarantee closer scrutiny and more trouble for you and your business.

Before I start with this segment I want to assure you I know no one reading this article would actually be tempted to make any of these arguments. But I thought it would be fun to take a moment to peek into the darker side of the Tax Audit World and to make the point that government tax auditors don’t respond well to hostility or any attempts at a cover-up.

An Auditor’s War Story

I still vividly remember my first case as an auditor where a business owner refused to show me any records. He told me it was his private property and unless I had a warrant he wouldn’t show me anything or answer any of my questions. He then threatened to have me arrested for trespassing if I didn’t leave. I had been on the job for less than three months.

I went to my supervisor and asked what I should do. After a brief conversation with me to insure I had acted reasonably, and a phone call to the business owner to see if my supervisor could reason with him, I was told to make what is called an “Estimated Assessment.”

“How?” I asked. “I don’t know anything about the business. I don’t even know if there is any reason to make an assessment!”

My supervisor answered as follows: “You wouldn’t be assigned the audit if we didn’t have some reason to believe there are errors. In this case a former worker filed for Unemployment Insurance Benefits. He said he worked there as an employee. The business is not registered with us nor filing payroll tax returns.”

Then my supervisor took me to the window and pointed to the large, fifteen-story federal building across the street. “Count the windows in the federal building then multiply that number by $10,000 and issue the assessment for that amount.” (I learned later the dollar amount changed depending on the size of the business). 

I was shocked. “Is that legal?” I asked.

“That’s the law. You can make a tax assessment based upon the best information available to you. At this time, that is the best information available to you. The judge will agree if the employer appeals.”

Tax Protesters

Here’s the moral of the story: Never try to stonewall a tax auditor. It doesn’t matter what argument you use. Tax agencies don’t tolerate it well. If you are persistent enough you may be placed on a “Tax Protester List.” This is not a list you want to be on.

Simply disagreeing with an auditor is not enough to make it on the Tax Protester List. You have the right to disagree. It’s the outrageous and illogical arguments, and refusing to recognize the government’s authority, that really makes them hostile towards you. If this happens, your account is flagged and whoever you talk to in the government will treat you with “polite disdain.” If you appeal to a judge, one of the first pieces of evidence the tax agency will introduce is why they have branded you as a “Tax Protester.” At that point the judge typically becomes suspicious of everything you submit for evidence and every argument you make.

You can also get on that list by making what are called “Frivolous Arguments. The IRS can fine you $5000 for making a Frivolous Argument. I’ve listed a few below, but this list is far from complete. Tax protesters have vivid imaginations and the list grows almost daily.

Frivolous Arguments You Should Never Make

• Stating the 9th Amendment to the U.S. Constitution allows you to object to military spending and any tax collection that may support the military.
• Arguing that taxes are owed only by persons with a fiduciary relationship to the government.
• The only “employees” subject to federal income tax withholding are employees of the federal government.
• Refusing to report or pay taxes on religious or moral grounds.
• Arguing collecting taxes is taking property without “due process,” and violates the Fifth Amendment.
• Filing tax returns is a violation of self-incrimination, protected under the Fifth Amendment.
• Forcing you to pay taxes is servitude…and illegal.
• Paying taxes is “voluntary”…
• Any outrageous twist or play on words involving the Tax Codes

This list goes on-and-on. If you’re interested you can go to numerous web sites that provide creative arguments. The point is, if you try to use these arguments the auditor will cease listening to your point of view seriously. If you are aggressive enough, you will be branded as “Hostile,” and possibly a “Tax Protester,” and treated accordingly. 

It’s better to work with the auditor, but keep your guard up. 

Keep the lines of communication open, especially in the beginning. You may be able to persuade the auditor on several points in your favor. It costs you less to win up front than after you have called in the lawyers. So work with the auditor without giving away the store. This is a delicate walk through hot coals at best.

Remember, no matter how polite and business-like the auditor is, or how nice a guy he appears to be, he is not your customer or your friend. Always keep your guard up.

It’s OK to disagree with an auditor and to provide sound, honest arguments and documentation supporting why you believe what you did is right. (I know you’ve started your Compliance File by now-if not maybe you should consider getting help for this vital task!)

What’s next?

What to expect and how to handle that “little talk” the auditor wants to have after he/she has looked over your records.