By now, as taxpayers, if we’ve ever had a scrape with the IRS or a state’s taxing agency, especially if we happen to be owing some, we are accustomed to getting letters, maybe getting phone calls, maybe even having some live person from the IRS show up at our door.

And we are familiar with the forms, and the questions: things like:

• Where do you work?
• Where do you bank?
• Do you rent or own your house or apartment?
• What is the rent?
• What is the mortgage?
• What is the maintenance or common charges?
• Do you own stocks or bonds?
• What are they worth?

All these questions, and more.

And, if you happen to get audited, the Revenue Agent (the IRS’s name for the person who does the audit) might send you a few pages of forms which ask you to provide specific information and documents to help answer these sorts of questions. The IRS calls them IDRs, which stands for “Information Document Request.”

If you don’t respond, and things get ugly, the IRS can drag you into court and have you explain to a judge why didn’t provide the information the IRS requested. You might have a good reason; you might not.

It’s all pretty low tech: letters, paper, phone calls, knocking on doors.

But according to an article in the Wall Street Journal, the Taxman is leaping quickly into the 21st Century and gathering information about taxpayers from Facebook walls, MySpace posts, chat rooms, and Google.

In “Is ‘Friending’ in Your Future? Better Pay Your Taxes First,” The Wall Street Journal’s Laura Saunders reports that state taxing authorities in Minnesota, Nebraska, and California have been catching long-time tax debtors and tax evaders who announce their professional and travel plans on social media sites. Other states are doing so as well, or at least thinking about it.

For example, one tenacious and inquiring tax collector found a delinquent taxpayer who was a “rigger of sails” by searching for his name and the phrase (“rigger…”). This search led him to a discussion board of local riggers, and in it, a discussion thread telling where this rigger went after his store closed.

With this morsel of information, the taxman located the missing “rigger of sails” and collected the unpaid tax debt.

While states are jumping into mine social media sites and more generally the internet, the IRS is playing its hand very close to the vest. It refused to comment on whether or how it might be using social networking sites.

Not scorpions, not reptiles, not hairy poisonous spiders, not jackals, not piranhas, not hyenas.

And while some taxpayers may swear that the IRS agent they talked to was worse than the mythical Leroy Brown (that is, “meaner than a junkyard dog” and who was “bad, Bad!”

fourteen years before Michael Jackson was “Bad”), experience suggests (and were a study conducted, empirical evidence, I believe, would support) that the people who work for the IRS are human, all too human.

The significance of this to a taxpayer in a jam is that if some IRS (or corresponding state taxing authority) staffer has been trying for months or years to collect a back tax debt, or just get the taxpayer to file one or more missing returns*, that salaried government employee just might develop an all-too-human negative impression of the taxpayer.

(*If you find a tax advisor who says you don’t have to file a return, hang on to your wallet, and run, don’t walk, to someone else!)

The Taxman’s Human? What’s the Downside?

Even if the taxpayer has one or one-hundred-and-one unassailable reasons to explain how it is that he or she wound up in this situation with IRS agents giving chase, and it all makes sense, the all-too-human IRS employee might form a decidedly negative impression which can affect how that employee might treat the taxpayer.

The IRS agent might become convinced that the taxpayer is trying to pull a fast one of some sort, or is lying, or cheating, or some combination of these or other bad things, and so treat the taxpayer based on these underlying impressions.

This has happened: for example, over the telephone one sunny afternoon, a New York State Department of Tax staffer snarled at me something like “Ms. Smith [the taxpayer] has had the unauthorized use of $40,000 of New York State’s money for the past five years, and I’m going to come get it.”

This Tax Department agent was ready to start freezing and seizing bank accounts, garnishing wages, using the Tax Department’s enormous power to reach in and grab whatever he could find, wherever he could find it. And, man, was he angry; angry at the taxpayer.

A powerful and common impression is that the IRS and, often-times even worse, the state taxing authorities, have auditors, collectors, and other staff who are all Terminator-like in their robotic, inexhaustible relentlessness, toughness, and harshness.

Ah Taxman! Ah Humanity!

Yet the humanity, fallibility, and frailty of those seemingly Terminator-like IRS employees are often contributing factors to their relentlessness and toughness.

This is one reason (there are several) to have a professional representative handle the case and speak to the IRS for the taxpayer, rather than have do it himself, or herself.

The old saying, “A lawyer who represents himself has a fool for a client” may apply here, to taxpayers who decide to represent themselves, on those difficult occasions when they get tangled up with the IRS.

Another example: an IRS agent complained to me about another taxpayer, saying that she, the IRS agent, did not “like” the taxpayer.

More than “not liking” the taxpayer, the IRS agent said she thought the taxpayer “cheats,” or, if not “cheating,” then something must be very wrong with the taxpayer’s business or her record keeping, or both.

This statement of deep distrust, suspicion, frustration and indeed, anger, was made to me, the taxpayer’s lawyer, at a meeting where the taxpayer was not present.

Despite these powerfully negative impressions of the taxpayer, this IRS agent ultimately reduced the taxpayer’s tax bill. She reduced the tax bill because evidence I presented which the taxpayer gave me, strongly supported the reduction.

Plus, because the taxpayer herself wasn’t present at this conference, she was not there to remind this all-to-human IRS staffer how much the IRS staffer had grown to distrust and resent the taxpayer.

Instead, with the taxpayer represented by counsel,  the IRS staffer was more able to focus on the evidence supporting the taxpayer’s case rather than getting caught up in the all-too-human emotions of anger, distrust, resentment and frustration.

Every time this IRS agent did stray from the issues, though, and started thinking about the taxpayer, the agent just saw red – and one thing you generally don’t want is to wave the equivalent of a red cape when the IRS is snarling angry-bull-style, in an all-too-human bull-snarl (do bulls snarl?).

*          *          *

People, businesses, entrepreneurs, freelancers, and regular salried employees all too often get into trouble with the IRS by making mistakes they didn’t even know were mistakes — find out how to avoid problem-creating tax mistakes with my free report, 7 Big Mistakes Taxpayers Make and How to Avoid Them, by clicking here, now.

Recently, in an attempt to resolve a dispute with the IRS before taking it to Tax Court, I met with an IRS auditor who had already slammed my new client with an additional $36,000 in tax interest and penalty by disallowing $90,000 of business deductions he claimed for his little company. My mission: persuade the auditor that many, most, or all of the deductions she had disallowed were legitimate, and that she should which should be recognized as legitimate.

Policy Changes Which Affect Everyone Revealed in Conversation About One Taxpayer

In the course of talking about my taxpayer’s business and deductions, we discussed more generally tax rules and policy. And in that part of the conversation, this auditor told me that starting now, more and more audits will involve multi-year examinations (what many of us call a “tax audit,” the IRS calls an “examination” — audit, examination, both words refer to the same thing).

So, for example, three years ago, a taxpayer might have been audited (or “examined”) for tax year 2005, now, it is much more likely that if the IRS initiates an audit, the audit will involve not just 2005, but also ‘06, and ’07.

IRS Uses Old TV Commercial Logic: “How Do We Do it? Volume!”

Why? Simple: it’s cheaper by the dozen! Three years in one audit costs the IRS less than doing only one year.

In fact, this auditor explained, doing multi-year audits has always been the official policy, but often it was not carefully supervised by the layers of internal management at the IRS. But now that the federal government needs money severely, the IRS is looking to get as much of a bang for its audit buck as it can.

Happy(er) Ending for Client

Meanwhile, over the course of 6 hours or so, I persuaded the this auditor to recognize more than half of the disallowed expenses as being legitimate, resulting in reducing the additional tax, interest and penalty from more than $36,000 down to about $6,000. The taxpayer considered that a very good result.

And, a Word to the Wise Taxpayer

And, so, a “take-away” for everyone else, be aware: multi-year audits are on the rise. One way to start being ready if you become a target of audit is to keep and have good records. It may be a great time to review your record-keeping system, or to develop one if you don’t have one!

Here we are in the thick of tax season and lots of people are getting their shoeboxes full of reciepts together, organizing their credit card statements and cell phone bills, so that they prepare their tax returns or go to their accountant to do it for them.

Some of us — the enviably well organized — may already be done. Maybe they’ve even prepared their returns already. So now, to file now and get it done? Or to wait until April 15th? Certainly you don’t want to be late (or if you have to be late, you want to file for an extension of time to file), but now the question is: on time or early?

What? No Gold Star? Three Ways Filing Early Might Help

Surprisingly, except three narrow situations, in most circumstances, filing early does you no good. You don’t get extra points or anything.

What you might get, if you are owed a refund, is your refund sooner than if you filed later. That’s one of the three situations: get your refund sooner.

The second situation is where you owe back taxes from prior years and are trying to set up a payment plan or an offer in compromise (that is — settle your whole debt for less than the full amount owed — you’ve soon the excessively rosy ads for this program on late night TV and heard about it on the radio, maybe even seen it in Google Adsense contextual advertising on the internet).

If you are trying to set up a payment plan or get an Offer in Compromise, you need to get your tax return filed to get that most recent tax year (now, 2008) included in the deal. Otherwise, it becomes its own separate obligation, and often that only complicates things.

The third situation is just a peace of mind sort of thing: If it will make you feel better knowing that your tax return is prepared, done, filed — signed, sealed, delivered — as Stevie Wonder might say, and as President Obama borrows from to rouse the crowds, that satisfied sense of completion, having that unpleasant chore done and checked off the To Do list could be another reason to file early.

On Time is as Good as Early, Actually, it May be Better

But under the rules, at least as I’ve read them, other than these three situations, filing early puts you in no better position than if you file on the due date, April 15th.

In fact, in one way, it potentially puts you at a disadvantage.

Here’s how: if you file on time, on the due date (April 15th), or after that, the IRS has three years from the day you file your tax return to assess your taxes. Most of the time this process of assessing happens quickly: the IRS reviews your return, and for most taxpayers, the IRS accepts their returns as accurate and agrees.

For example, you say you owe 3,500 in taxes, you had 3,000 withheld from your paycheck and you enclosed a check for $500 with your return — you say you’re “even” and “paid up” and the IRS agrees. You’re done.

But, for some taxpayers, the IRS either disagrees or isn’t so sure. In those situations, it will initiate an audit (or “examination” as the IRS tends to call it). In an audit, the IRS will recalculate and tell you how much it thinks you owe. Or it will say to the taxpayer, essentially, “we think your tax return is wrong — please provide documents to support x, y, or z deductions.”

The IRS has three years to do this audit process, and then assess what the tax bill is.

Or, more exactly, the IRS has three years if you file your tax return on the due date or later. If you file early, say on March 15th, instead of April 15th, the three year countdown clock for the IRS to audit and asses does not start ticking until the final due date, April 15th.

Do You Want to Give the IRS the Gift of Time?

So, by filing a month early, you give the IRS an extra month to think about your tax return and decide whether to accept it as filed, or to challenge it with an audit. If the IRS uses that extra time to decide to audit you, you have done yourself harm by giving the IRS extra opportunity to audit when it otherwise would not do so.

It is unlikely that it happens often. And, in fact most taxpayers, whether individuals or businesses, don’t get audited. But considering how stressful getting a letter from the IRS saying they intend to audit (the letter will likely say “examine”) your tax return, who wants to increase the chance of that happening?

This is counterintuitive. One would think that nothing could be better than just getting this big chore done and over with. But the three circumstances where filing early does you good are narrow. In all likelihood, you’re better off filing on time rather than early.

A visitor to my website found it by asking this question in a search on Yahoo: “When does the statute of limitations run out for audits?”

The shortest answer is three years.

So the IRS Has Three Years – Three Years Starting When?

But that’s not quite enough information all by itself. The first, next question is: three years from what? What event makes the clock start ticking and counting down?

The shortest answer is that the clock starts counting down, when you, the taxpayer, file your tax return. But that’s not quite the whole story either:

The clock starts ticking upon filing when you file on the due date (like April 15th) or later. But, the clock does not start ticking if you file your return early. For example, if you filed your tax return on March 15th, a month before the day that’s so big on everyone’s mind, April 15th or “Tax Day” as some now call it.

Instead, if you file your tax return early, again, say on March 15th, the IRS will say ‘thank you very much,’ but the statute of limitations clock won’t start ticking until the due date, April 15th.

This is one of those things that puts the rules of taxes into a sort of bizarro-world (many would say one of many!).

The IRS Wants it Bad!

This early filing rule is a little strange because it seems to convlict with the IRS’s desire for taxpayers to file their tax returns. We know that the IRS wants taxpayers to file their tax returns, and, if a bureaucracy could have and express emotions, you could say that the IRS wants this badly. Really wants it. Really wants taxpayers to prepare and file their tax returns.

Yet, however bad the IRS wants it, the tax system’s rule that filing early doesn’t start the clock ticking discourages taxpayers from filing – or at least from filing early, and that seems just a little bit bizarre.

This rule discourages early filing because who wants to give the IRS a free ride? Who wants to give it even more time to decide whether to do things that can make your life difficult? And so, this rule seems to be at odds with the IRS’s strong desire to have taxpayers actually file their returns, though there are a few arguably reasonable reasons for having the rules set up this way.

Still, one would think that the IRS would be inviting and encouraging taxpayers to get their taxes filed, at all, on time, even early, and would add a few carrots to the bundle of sticks it brandishes at those who file late or not at all.

How Do We Know That the IRS Wants It Bad?

Just look at their rules! The IRS charges heavy penalties plus interest for filing late and for not filing at all. By doing this, the government punishes late-filers and non-filers by making it expensive.

And, more than making it expensive, if you ever want to make any kind of arrangement to resolve a tax problem, like if you wanted to set up a payment plan, or an offer-in-compromise or even to be put into “uncollectible status,” the first thing the IRS will insist on is that you get your unfiled tax returns filed.

Like Blofeld, Goldfinger, Largo, and so many other James Bond villains, the IRS says to taxpayers with unfiled returns, “No deals, Mr. Bond.”

Plus, if you want to try to get all or even some of your taxes discharged in bankruptcy, you must have filed your tax returns.

Filing your tax returns is one of five necessary elements to wiping out tax debts in bankruptcy. Again, without filing your tax returns, the Bankruptcy Court will be required by law to say, “No deals, Mr. Bond.”

No filed tax return = no discharge in bankruptcy.

So, does the IRS want it bad or what?

One more example: Hollywood movie star and convicted tax criminal Wesley Snipes: He has been sentenced to spend years in federal prison for committing the crime (yes, crime) – in fact, felony – of not filing tax returns.

Looking at these bunch of rules, let there be no doubt or dispute – the government wants us to file our tax returns, and has created a whole bunch of carrots and sticks (mostly sticks) to get us to do it.

Considering how badly the IRS wants taxpayers to file their tax returns, and to do so on time, you’d think they’d give taxpayers a gold star or something for being so organized and diligent that they filed early. But that just isn’t how it works.

With all the rules that articulate and carry out the government’s policies, it seems bizarro, but it is nonetheless true, that if you file your tax return early, not only do you not get a carrot, but in a way, you get a stick.

Because not only does the clock not start until the final due date for filing your tax return, but essentially, you are giving the IRS an automatic extension of its statute of limitations to decide what to do – whether to accept your return as correct and assess your tax bill based on what you submitted, or stop to wonder if there’s something wrong, and make your life more difficult by deciding to so examine – or audit – your return, and then assess your tax bill.

Conclusion: Three Years or More, Depending

To summarize: The IRS has three years to assess tax after you file your tax return. This time limit includes conducting an audit to examine the accuracy of a tax return and then assess tax after the audit.

The three-year statute of limitations starts with the date of filing a tax return if it was filed on the due date (like April 15th) or after the due date. If filed early, then the statute of limitations does not start to run until the actual due date for filing the return.

There are additional traps though: in some situations, the three-year statute of limitations never starts to run and so the IRS has an unlimited amount of time to audit and assess tax. I’ll take that up in another post. Stay tuned.