How to Survive an IRS Audit

Audits are serious and nerve-racking. The IRS conducts examinations because they think you mistakenly or intentionally claimed deductions or exemptions you shouldn’t have. The IRS only pursues an audit if they think they can produce revenue. Audits are not random in the sense that the IRS does not audit a tax return unless there is a potential problem. The good news is that you have the opportunity in an audit to defend your deductions and prove your side of the story. The key to surviving an audit is knowing which deductions and exemptions are defendable and which are not before you ever interact with the IRS, knowing what the IRS can and cannot ask for, and what constitutes proof.

According to the National Taxpayer Advocate’s written statement to Congress concerning her 2009 annual report, “A recent TAS research study [found] that where EITC taxpayers are represented in audits, they are nearly twice as likely to receive the EITC and receive almost twice the amount of EITC as unrepresented taxpayers.” While this deals only with audits where the Earned Income Tax Credit (EITC) was at issue, the meaning is clear. Hiring a representative gives taxpayers a definitive advantage when facing an IRS tax audit.

Did You Know?

Did you know that when the IRS sends you a notice telling you they changed your tax return and adjusted your tax liability that you have been audited? If they send you a letter asking you to send in documentation to support a deduction or exemption, they are auditing you. Treat it seriously. If the IRS decides you owe them money, it is likely they will extend this audit into other years. Do not ignore an audit notice. The IRS will not just go away.

Tip #1: If you receive a notice like this, respond!

“Correspondence audits” carry all the weight of an office audit or a field audit. You also have all the same appeal rights if you were not treated fairly. Our advice? Seek representation immediately upon receiving an audit notice.

Just because the IRS sent the notice does not mean they are right! Much to the contrary, in our experience the IRS frequently overstates tax due in an audit. Too many people make the mistake of trusting the auditor.

Tip # 2: IRS Auditors do not have to tell you the truth. They can lie to get you to spill information you shouldn’t.

If you choose to represent yourself, the Auditor assumes you have a knowledge of tax law adequate to offer a defense. You are NOT Matlock, ask for some help.

How to Handle a Correspondence Audit

 The correspondence audit is the most widely used examination technique by the IRS. Correspondence audits allow the IRS to touch more taxpayers and collect more revenue with less effort than any other audit type.

The reason is simple. When the IRS sends you a letter that says they changed your return and you owe X dollars, you may not even realize you’re being audited and have the right to challenge the IRS’ findings. Many people simply pay the amount due without ever understanding they have the ability to stand up for allowable exemptions and deductions.

The IRS loves correspondence audits, expanding correspondence examinations from 54 percent of all examinations in FY 2000 to 72 percent of all audits in FY 2008. The IRS computers can send many more letters in a day than an agent can meet with taxpayers about their tax returns. The problem is, correspondence audits have a track-record of being inaccurate. According to the National Taxpayer Advocate 2009 Annual Report to Congress, “The likelihood that the IRS had obtained the right result the first time [a correspondence examination was sent] was not much better than a coin toss would produce.”

Step 1—Realize you are being audited.

If you receive an inquiry from the IRS asking you to send them documentation supporting a deduction or exemption you claimed on your tax return, you are being audited and you should act appropriately.

If you receive a bill from the IRS in which they inform you that they have adjusted your tax return, which resulted in you owing more tax liability, you have been audited and you have a short period in which you can appeal the IRS findings.

Step 2—Review the exemptions and deductions on the tax return in question.

Take a few minutes to go over your tax return and determine if you have the evidence to support the deductions and exemptions you claimed. Before contacting anyone, take the time to understand what the IRS is questioning.

If you cannot easily determine what deductions or exemptions the IRS is calling into question, or if you disagree with the IRS’ stance, it is probably a good idea to seek representation.

Step 3—Decide on a course of action.

In EITC audit cases alone, taxpayers are twice as likely to win their audit if they have a tax representative helping them argue their case.

If you disagree with the audit findings, or if the IRS has requested you send in proof of deductions or exemptions, we believe your next best step is to hire a representative to assist you.

It’s also important to understand that the final audit findings may influence the IRS’ decision to audit additional tax years. Failing to utilize a competent tax representative can have negative effects for your current audit that reverberate across multiple tax years and can continue to haunt you in the future.

If you agree with the IRS findings, simply write the IRS a check and send it in.

How to Handle an Office Audit

The office audit is straightforward in nature, but can hold many pitfalls for unsuspecting taxpayers.

One thing we continually tell people is that we cannot un-say something you already told the IRS. You have the right to remain silent and to representation. Whether you choose to exercise that right is up to you. We would never advise anyone to attend an office audit without a competent tax representative to help you make your argument.

Step 1—Review the tax return in question.

Take a few minutes to go over your tax return and determine if you have the evidence to support the deductions and exemptions you claimed. Before contacting anyone, take the time to understand what the IRS is questioning.

Step 2—Hire a representative.

In EITC audit cases alone, taxpayers are twice as likely to win their audit if they have a tax representative helping them argue their case.

Whether you think you have a chance at winning an IRS audit or not, it is never a good idea to attend an audit without representation. If you are in the right, the representative will argue the merits of your case and the IRS agent must at least listen. Your representative will also tell you if your arguments are likely to succeed or fail. And if you have no evidence to back up your case, a tax representative will be able to minimize the damage as much as possible.

Just as you would never go downtown to speak with a Police homicide detective without an attorney, it is seldom (if ever) a good idea to attend an IRS audit without representation.

It is generally a poor idea to hire the same CPA who prepared your tax return to represent you in an IRS audit. Logically, if he or she knew something in the return could cause an audit and didn’t tell you, you don’t want that person representing you. And if he or she didn’t know something in that return could trigger an audit, you certainly don’t want that person representing you now.

Step 3—Prepare for the audit.

Work with your representative to clarify the plan. Make sure you supply your representative with everything he or she requests and be open, honest, and cooperative. Answer your representative’s questions simply and directly. If you do not have specific documentation and evidence, make sure to let your representative know.

Step 4—Attend the audit or have your representative attend on your behalf.

Tax representatives disagree on how to handle audits. Some want to attend the audit on their client’s behalf without the client being present. This ensures the client will not say something incriminating during the audit. Others want the client to attend the audit so all the auditor’s questions can be answered immediately.

Step 5—Agree with the audit findings or appeal.

Waiting for audit findings can be excruciating. After all the drama of the audit itself, the wait for the audit report seems to take forever. When it does finally come, you have a couple options.

If you agree with the audit findings, follow the instructions for remitting any payment you owe the IRS and get back to your life.

If you disagree with the audit findings, talk to your representative about appealing the audit and about your odds of winning that appeal. At this point, it becomes a financial decision as to whether you think you will spend more paying the tax outright or paying your representative to appeal the audit findings.

How to Handle a Field Audit

The field audit is the rarest of audits and in many ways the most serious. Field audits are typically reserved for larger corporations or taxpayers who have significant business income.

If the IRS wants to conduct a field audit, it is imperative that you have a tax representative present. It’s also imperative to determine if you are dealing with a Criminal Investigations Division (CID) Agent or a typical IRs Agent or IRS Revenue Officer. Remember, you have the right to remain silent and the right to tax representation. Whether you choose to exercise those rights is up to you. We would never advise anyone to host the IRS without a competent tax representative in attendance.

TaxMasters does not provide legal services and cannot offer an opinion as to whether the reasons for your audit or any other audit constitute a prosecutable crime. TaxMasters does not represent taxpayers in criminal tax cases. Our aim is to help taxpayers before tax problems can escalate to the point of being classified as criminal.

Step 1—Determine whether you are hosting an IRS Agent or a CID Agent

Standard procedure for most field audits is for the IRS to send a standard IRS Agent. If the IRS is sending a CID Agent, you may need legal representation. CID Agents typically investigate criminal matters and carry badges and guns. If you are dealing with the CID, the IRS thinks you have done something seriously wrong and they are about to do their best to find proof for their suspicions.
As a reminder, TaxMasters does not provide legal services and cannot offer an opinion as to whether the reasons for your audit or any other audit constitute a prosecutable crime. TaxMasters does not represent taxpayers in criminal tax cases. Our aim is to help taxpayers before tax problems can escalate to the point of being classified as criminal.

Step 2—Hire a representative.

In EITC audit cases alone, taxpayers are twice as likely to win their audit if they have a tax representative helping them argue their case.

Whether you think you have a chance at winning an IRS audit or not, it is never a good idea to engage an IRS Agent or Revenue Officer without a representative being present. If you are in the right, the representative will argue the merits of your case and the IRS Agent must at least listen. Your representative will also tell you if your arguments are likely to succeed or fail. And if you have no evidence to back up your case, a tax representative will be able to minimize the damage as much as possible.

Just as you would never volunteer to spend time with a homicide detective who showed up at your office without an attorney, it is seldom (if ever) a good idea to attend an IRS audit without representation.

It is generally a poor idea to hire the same CPA who prepared your tax return to represent you in an IRS audit. Logically, if he or she knew something in the return could cause an audit and didn’t tell you, you don’t want that person representing you. And if he or she didn’t know something in that return could trigger an audit, you certainly don’t want that person representing you now.

Step 3—Prepare for the audit.

Particularly in a field audit, you want to be as prepared as possible before the IRS shows up. Work with your representative to create a plan. Make sure you supply your representative with everything he or she requests and be open, honest, and cooperative. Answer your representative’s questions simply and directly. If you do not have specific documentation and evidence, make sure to let your representative know.

Step 4—Attend the audit or have your representative attend on your behalf.

Tax representatives disagree on how to handle audits. Some want to attend the audit on their client’s behalf without the client being present. This ensures the client will not say something incriminating during the audit. Others want the client to attend the audit so all the auditor’s questions can be answered immediately.

If ever in doubt in an audit, “I don’t know” is a perfectly reasonable response if it is truthful. It will likely result in the deduction being disallowed, but you can appeal or provide the proof after the audit meeting.

Step 5—Agree with the audit findings or appeal.

Waiting for audit findings can be excruciating. After all the drama of the audit itself, the wait for the audit report seems to take forever. When it does finally come, you have a couple options.

If you agree with the audit findings, follow the instructions for remitting any payment you owe the IRS and get back to your life.

If you disagree with the audit findings, talk to your representative about appealing the audit and about your odds of winning that appeal. At this point, it becomes a financial decision as to whether you think you will spend more paying the tax outright or paying your representative to appeal the audit findings.