Too Poor to Survive, Rich Enough for Tax Audit?

Dec. 8, 2009 — -- Can you get audited for being too poor? That's what one Seattle woman says happened to her.

Rachel Porcaro, 32, a single mother of two, is still fighting to get her accountant's bill reimbursed after spending more than a year fighting off an Internal Revenue Service demand that she pay the government $16,000 -- more than three-quarters of her then-annual salary as a hair dresser.

The agency, Porcaro said, alleged that she failed to report sources of taxable income outside her hair dresser's salary on her 2006 and 2007 tax returns.

What drove the IRS to that conclusion? The fact that, according to their statistics, Porcaro, who earned just under $19,000 in 2006, couldn't possibly afford to raise her children on her salary alone.

"The tax compliance officer pulled out an Excel spreadsheet printout and said something to the effect of … (that) IRS data showed that it takes $36,000 to support a family of three in Seattle," said tax manager Dante J. Driver, an accountant who worked with Porcaro to appeal the IRS's claim. "It looked and smelled like she was getting audited for being too poor."

The IRS declined to offer comment on the case to ABCNews.com, saying that federal privacy laws forbid the agency to discuss individual cases.

Porcaro, who said she receives no child support payments and owns neither a home nor a car, says there's a good reason she can afford to support her two sons -- she lives with her parents and pays just $400 in rent for a basement apartment in their Seattle home.

"Without my parents' help, my kids wouldn't be in such a healthy environment," she told ABCNews.com. "I can afford to put decent clothes on their backs and food on the table."

But that explanation didn't help Porcaro's case, which was first reported by The Seattle Times. The IRS, Driver and Porcaro said, argued that Porcaro shouldn't qualify for the earned income tax credit (EITC), a tax credit for the country's working poor.

The credit has been often criticized as being a frequent target for fraud. In a recent Government Accontability Office report, the government described EITC fraud as an "evolving challenge." In the 2009 fiscal year, the IRS collected $3.2 billion through audits related to the earned income tax credit, according to the GAO.

Porcaro said she doesn't object to the IRS's efforts to hold such audits. But what she doesn't understand is why hers had to take so long.

'A Vicious Cycle'

Porcaro said she received her first notice from the IRS in late 2008. By early 2009, she began working with Driver and it wasn't until that summer that the issue was resolved.

During that time, Porcaro said, an IRS auditor demanded to see more than just bank records and receipts -- she wanted her children's birth certificates, social security cards, custody records and proof that they lived with her.

Porcaro prevailed in August, when the two sides agreed that she would pay just $1,600 to the IRS instead of $16,000.

Driver said that Porcaro could have fought that $1,600 debt too -- a charge the agency levied because it alleged Porcaro wrongly filed as head of household on her taxes and should not have claimed tax deductions for supporting her sons. But the time and money it would have cost to keep the battle going, Driver said, wasn't worth it.

The agency, meanwhile, didn't stop with Porcaro. The same month Porcaro agreed to pay $1,600, the agency audited her parents.

The IRS auditor pursuing Porcaro's case "flat out said she was looking into them because of me," Porcaro said. "It was just a vicious cycle."

Robert Porcaro, Rachel Porcaro's father, said he has been audited before, both personally and through his 30-year-old painting business. But this, he said, was different. Among the records Robert Porcaro and his wife were asked to provide: blueprints of his Seattle home showing where his granchildren, Rachel Porcaro's children, live.

"It's just been a real nightmare," he said. "I got the sense that they had somebody in their grips that they were going to make an example of."

The 59-year-old said that, fortunately for him, the IRS's audit ultimately found that he didn't owe anything more. In fact, it was just the opposite: The audit determined that government owed Porcaro some $200.

That was cold comfort to the Seattle man, however: His accounting fees totaled $2,000.

Rachel Porcaro's accounting bill is even higher -- $8,000. Driver said he is working to recover that fee from the IRS itself.

Porcaro said she continues to be grateful for her parents' help. She found Driver, she said, through the help of her father, who uses Driver's firm, G.A. Michael and Company, for his painting business.

She said she wonders what happens to others like her who don't have the means to "lawyer up."

"If I didn't have my family's support, I would have tossed my hands up," she said. "I wouldn't have been able to prove to them anything on my own."