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Leveling The Playing Field

How the new, small-business-friendly tax-reform laws can help you in an IRS audit.

How the new, small-business-friendly tax-reform laws can help you in an IRS audit.

New business owners would disagree that tangling with the IRS can be an emotionally and financially draining experience. Horror stories of overzealous IRS agents closing down small businesses fan the flames of fear, as many small-business owners believe that they simply cannot afford to fight the government--even if the IRS is dead wrong. What can you do when it seems the IRS isn't playing fair?

The passage of the Taxpayer Bill of Rights 2 in July 1996 has added some powerful new weapons to the small-business owner's arsenal with which to fight the IRS. Knowing these rights before the IRS comes knocking may be the only way to prevent them from destroying your otherwise healthy business.

"This new law finally levels the playing field for small-business owners by making sure that, if money or property was wrongfully obtained by the IRS, a business owner can get it back quicker from the government," says Congressman Jon Fox (R-Pa.), a strong advocate of the Taxpayer Bill of Rights 2. "Frankly, I'm working on a new Taxpayer Bill of Rights which would shift the burden of proof to where it belongs, on the IRS."

Even the most sophisticated business owner would generally acknowledge that, when it comes to what the IRS can and cannot do under the law, they are in the dark. For example, many business owners have no idea that, under current law, the IRS can shut down a business and seize its assets with virtually no prior notice to the owner. This may sound drastic, but the IRS has this option at its disposal.

When IRS agents in Colorado Springs, Colorado, started a routine audit of a small chain of children's clothing stores owned by members of Carol Ward's family, the family had no idea of how ruthless the IRS could be. After Ward insulted an IRS agent by questioning her competence and honesty, she found herself and her family embroiled in an IRS nightmare.

On April 19, 1993, about one month after the encounter with the IRS agent, gun-toting federal agents raided each of the three family-owned stores and seized all of Ward's business assets. Worse, the IRS emptied her personal and business bank accounts and even filed a lien on her mother's home. IRS agents posted notices in each of the stores notifying the public that the IRS had assessed that the Wards owed $325,000 in back taxes, penalties and interest. The agents seized everything that the Wards owned by using a little-known provision of the tax code called a "jeopardy assessment." Although this heavy-handed assessment is designed to be reserved for use in assessing taxes owed by international criminals who are clear flight risks, the IRS used this extreme measure against the Wards anyway. (Citing taxpayer-confidentialty laws, the IRS refused to comment on the Ward case.)

Two months after the raid, the IRS recalculated Ward's taxes, based on an audit of her tax returns for the previous six years. The new assessment (including penalties and interest): $3,485. Although it was clear that the IRS had made a horrendous "mistake," the IRS didn't even offer so much as a private apology. Amazingly, they even refused to accept the owed taxes unless Ward agreed not to sue the IRS for their misconduct. When Ward began to search for an attorney to represent her in a suit against the IRS, she encountered a lot of sympathy, but could find no one who was willing to take on the IRS without a commitment to cover legal fees, which she was told could reach $100,000 in a battle with the government. Moreover, under the then-existing law, it would be difficult to recover any attorney's fees, which made the task of finding representation even more daunting.

Finally, with the help of the media, Congressman James A. Traficant Jr. (D-Ohio), Representative Pat Schroeder (D-Colo.), and Colorado Senator Hank Brown, Ward recovered her seized property. She also found an attorney who was outraged enough to risk taking on the case against the government, and her case is now pending in the federal courts.

"It was amazing. My own government had burst into my store, terrorized my family and customers, and destroyed our lives to retaliate for my unkind words about an IRS agent. Now, instead of an apology, they have mounted a campaign to discredit me, and tried to intimidate me into not filing a lawsuit against a rogue IRS agent," says Ward. "The most annoying part is that the American taxpayers are footing the legal bill to defend the IRS' illegal actions against me! What I didn't understand three years ago was that, even though the IRS knew they were wrong, they simply didn't care."

Despite the fact that her suit against the IRS has not yet been settled, Ward felt vindicated in May of 1996, when Congressman Traficant delivered an address on the floor of the House of Representatives, congratulating Ward on her determination, courage and conviction in her noble fight against the IRS. The address was met by a standing ovation on the House floor. Congress went one step further than simply recognizing the Ward case: They authorized a bipartisan task force to study the question of IRS reform, known as The National Commission on Restructuring the Internal Revenue Service.


Sean P. Melvin is an attorney in the Malvern, Pennsylvania, law firm of Lentz, Cantor, Kilgore & Massey Ltd., counseling entrepreneurs and business owners. His book, The Entrepreneur's Handbook of Business Law(Macmillan/Simon & Schuster, $15.95, 800-428-5331), will be released in July, 1997.

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