Tax Season: Understanding the I.R.S.

My first job out of law school was situated two blocks from the White House, working in a cubicle for the Internal Revenue Service.  I worked as a tax lawyer in the Exempt Organizations Group and reviewed organizations for a determination of tax exempt status.  Pretty exciting, right?  While working for the IRS was not exactly my childhood dream, it was an interesting job with both some good and bad qualities.  There were some smart, hardworking people.  There were some lazy people.   There were times when I felt like the system was doing some good.  There were times when the bureaucracy ground things to a halt.  At the end of they day, the IRS is definitely one of a kind.

The IRS is massive.  It processes over 200 million tax returns a year, not to mention all of the other reporting and applications it reviews.  If you have an issue, it is always important to remember where in the organizational structure you fall.  Half the challenge is finding the right person.  Roughly 95,000 people work there.  The IRS has four divisions:  Wage and Investment (headquartered in Atlanta); Large Business and International (Washington DC); Small Business/Self-Employed (Maryland); and Tax-Exempt and Government Entities (Washington DC).  If you find the key person, be polite and hope that they take interest in helping you to work through your issue.  Red tape is tough.  The employee holds the scissors.

If you cannot work things out on the ground level, it is important to understand the mountain of laws and regulations that govern the IRS.  Congress passes tax laws which are compiled in the Internal Revenue Code (totaling approximately 3.7 million words).  The tax laws are sometimes vague such that the Treasury Department issues further specifics which are contained in the federal tax regulations.  The IRS then regularly publishes official tax guidance, such as revenue rulings.  These sources provide the answers to the questions of both IRS employees and taxpayers. Hopefully, there is relatively clear guidance in these sources.  If not, it can be a mess.

If a disagreement occurs, the IRS has a structure to deal with tax disputes.  Attorneys and CPA’s are regularly involved.  Once the IRS issues its determination, taxpayers who disagree can move through an appeals process.  Appeals are first handled through an internal administrative hearing.  Further appeals move to the U.S. Tax Court in Washington, DC. (with the possibility of further appeal to the DC Circuit Court of Appeals and US Supreme Court).   At the same time, rather than fight for years in court or avoid an IRS collection agent, the IRS allows settlement through an agreement called an Offer in Compromise.  If you ever find yourself in this position, seek a fair settlement first and fight the monster only as a last resort.

– Chad J. Cochran