Sparring with the IRS is never a cakewalk, especially if you're a small-business owner without legal representation. But if you're fortunate enough to win help from a free law clinic, dealing with the IRS can be a lot less taxing.
Such was the case for entrepreneurs Carol and Fred Toerge, who operate an industrial design firm in Sun Valley, California. Trouble began for the Toerges when the IRS audited their 1994 tax return. The agent in charge zeroed in on business deductions the couple had claimed for lumber, nails, packing crates and other materials used in their business.
The IRS agent disallowed the deductions, claiming the materials were also used for personal reasons. At the end of the audit, the Toerges received a tax bill totaling more than $4,000, not including interest and penalties.
Feeling blindsided, the couple took their case to the U.S. Tax Court. "The IRS hadn't been fair in our audit," says Carol, "and we wanted to fight it--not just roll over." They requested a court date for the case.
That's when help arrived. Along with a notice about their court date, the Toerges received information about free legal assistance offered by a law school tax clinic at Chapman University in Orange, California.
Chapman is one of several law schools nationwide that operates clinics to help business owners and individual taxpayers solve their federal and state tax problems. (For a list of law schools offering these tax clinics, see "Back To School".)
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.
Getting An Appointment
Few people know about tax clinics because they receive little publicity. The U.S. Tax Court informs taxpayers of this service after an audit only if the taxpayer doesn't have an attorney.
"We have to be sensitive [about] going out there and saying we have this clinic when [a client may] have an attorney already representing them,' says law professor, CPA and certified tax law specialist Frank Doti, who directs Chapman's clinic.
After reading through the information they received, the Toerges realized they qualified for tax clinic help and requested it from Chapman. Doti reviewed the couple's case and assigned it to a student in his final year of law school.
The student provided the Toerges with the legal representation they needed, says Carol. He reviewed the pertinent details, looked at the couple's receipts and helped them reconstruct some of their records. He then negotiated with the IRS on their behalf and was able to avoid a court battle. As a result, the Toerges reduced their tax bill by about half, says Doti.
Carol says the experience was very satisfying. "The student who worked with us was totally dedicated,' she says. "Having someone go to bat for us was wonderful."
Using the services of a clinic is also cost effective, Doti points out. In most cases, the amount in controversy is less than $10,000, and hiring an attorney doesn't make sense economically. The assistance the Toerges received, for example, would have cost them more than $2,000 if they had used a tax attorney, he maintains. "As a result of the law student's work, they saved $2,000 on their tax bill," he says, "plus they didn't have to pay for the help."
Too often, business owners and individual taxpayers just give up and pay the amount in dispute. This is unfortunate, says Doti, because the IRS may be in error.
Doti finds a common theme in the cases Chapman College's tax clinic represents on behalf of small-business owners. "A typical scenario involves a small-business owner who takes a deduction for travel, entertainment or some other business expense, which the IRS looks for some way to challenge," he says.
Many taxpayers don't understand the tax rules or aren't aware of what's needed to get the IRS off their backs, says Doti. "We assist taxpayers by explaining federal and state tax requirements or by helping them present the appropriate documents to the IRS."
Former Chapman law student Brad Etter describes the services provided by the clinic as a win-win situation for everyone involved. The students benefit from the experience of working for real clients on actual federal and state tax disputes. Taxpayers benefit by getting free legal assistance which, in most cases, enables them to reach an agreement with the IRS that's more to their liking than if they had no representation.
As part of the Chapman program, Etter represented an engineer with a sideline rental property business. The IRS disallowed about $10,000 of his deductions for business expenses because they maintained he was not a full-time manager of the properties.
The entrepreneur had hired people to keep the books on the properties and to process checks, among other tasks. Etter was successful in getting all of his deductions reinstated, saving the engineer a substantial sum of money.
While most tax clinics work to the benefit of taxpayers, there aren't enough clinics or law students to go around. As a result, tax clinics are forced to turn away a good number of taxpayers. At Chapman, Doti reviews the cases that come in to determine whether they will be assigned to students or declined. He usually tries to take as many cases as possible in which the IRS has been unfair or overreaching, he says.
Because of the way the tax clinics operate, business owners can't just walk in and request assistance. In addition to being without legal representation, a taxpayer must pay a $60 fee to file a one-page petition with the tax court after an audit, indicating that he or she plans to dispute the audit's outcome with the Tax Court. When a taxpayer meets those criteria, the court sends a notice about the availability of free tax clinic services in his or her area.
A Second Opinion
Taxpayers who don't qualify for tax clinic assistance may find solace in the recently enacted 1998 IRS Restructuring and Reform Act. Many of the IRS abuses detailed in recent Senate hearings centered around tax audits and collections. This new law addresses many of those problems by providing taxpayers with new protections.
Under the new law, taxpayers can claim higher attorney's fee awards on more liberal grounds, says Mark Luscombe, principal analyst with CCH, a provider of tax and business law information in Riverwoods, Illinois. The new law also states that if the IRS takes an unreasonable position in a tax case, the taxpayer can be awarded attorney's fees even in pro bono situations, he explains.
In addition, taxpayers can collect up to $100,000 against an IRS officer or employee who negligently disregards the tax code or IRS regulations. Another change makes the Tax Court more accessible by increasing the small tax case limit from $10,000 to $50,000. "This new legislation is opening some doors for small-business owners to have their day in court,' says Doti.
Moreover, the new law requires the IRS to revise the current Taxpayer Bill of Rights so taxpayers will have a better understanding of their rights. Specifically, the IRS has been instructed to make it clear to the public that taxpayers have the right to be represented by an attorney, accountant or enrolled agent at IRS interviews and that it's possible for a taxpayer to postpone an interview.
While trying to resolve a tax dispute with the IRS may seem a lot like walking on hot coals, free tax clinics and expanded taxpayer protections promise to make the experience a little less painful. So don't despair. If you believe your tax case has merit, stay in there and fight.
Back To School
Here's a list of universities with law clinics that offer assistance to both entrepreneurs and individual taxpayers involved in disputes with the IRS:
American University, Washington, DC
Chapman University, Orange, CA
Georgia State University, Atlanta
Loyola University, Chicago
Loyola University, New Orleans
Rutgers University, Newark, NJ
Southern Methodist University, Dallas
University of Denver
University of Minnesota, Minneapolis
University of New Mexico, Albuquerque, NM
Villanova University, Villanova, PA
Yeshiva University, New York City
CCH Inc., (800) 248-3248, http://tax.cch.com