You know the tax code is complicated when the IRS itself can't figure it out. According to an audit by the Treasury Department's inspector general for tax administration, IRS tax counselors provided erroneous information for 19 of the 23 returns presented by undercover auditors, for an unsettling error rate of 83 percent.
Results from the audit, conducted from February to April 2003, were released earlier this year. Auditors visited more than two dozen of the IRS' 200 Taxpayer Assistance Centers, where taxpayers meet with counselors for help with returns. Investigators found that counselors inaccurately advised clients about what forms to use, which deductions to take and what income to report. The IRS declined to be interviewed, but attributed most errors to third-party taxation software in a statement in the inspector general's report last January. The agency also added a statement saying action was underway to train counselors to do a better job of asking taxpayers about their financial status and eligibility for tax credits and deductions.
The audit reinforced views among professional tax advisors like Jay Schlichting, an enrolled agent and founder of The Schlichting Group in Dallas, who calls the IRS "a poor place to go for tax advice." Lack of training and complex tax laws, he says, cry out for help from an independent professional.
While the mistakes resulted in bigger refunds for the make-believe filers, real-life mistakes can go the other way. For entrepreneurs, a gaffe creates the potential inconvenience and cost of returning a refund or paying more taxes. If the IRS determines a case of underpaid taxes, the agency may charge a penalty and interest based on the outstanding balance. You can't avoid paying the taxes you owe, but written proof documenting erroneous information from the IRS is usually enough to rescind penalties and extra interest.
But those who have to pay back a generous refund don't get sympathy. "If you [go] back owing what you should have paid in the first place," says Christopher S. Rizek, a member with Caplin & Drysdale, a Washington, DC, law firm, "where's the harm?"