An audit is when the IRS requests that you contact them to provide proof of deductions, income, or to consider the treatment of various items on your tax returns. Many people mistakenly think that all they need to do is to bring their receipts and other information to the revenue agent as verification. What they don’t realize is that the IRS examiner is trained to ask probing questions, and to come up with reasons why your deductions are not acceptable. In fact, the professional community has complained that in a tax audit they often do not distinguish between the questions asked in a general audit vs. a criminal investigation. You will be asked financial status questions focusing on your lifestyle, standard of living, and other elements unrelated to the items on your tax return. This is one reason why even if you have receipts, and feel that your return was prepared correctly, you could still be in jeopardy. The tax code is written in a manner that leaves a lot open to interpretation. You must meet ‘purpose’ tests, and other tests that even many accountants take for granted. I have personally experienced an auditor denying deductions for my clients when I felt we had enough evidence to justify our position! So basically, any time the IRS requires you to prove something to them, you need the help of an experienced professional who knows what the law is and how to argue your position. The ability to represent your position and at the same time maintain a good rapport with an IRS exam person is essential. Otherwise the IRS tax audit person can and will make adjustments against you.
IRS Audit Representation Before The IRS
Audits are selected based on IRS programs. One program looks for compliance and another tries to find errors. They have not examined your return yet. Are you afraid? Want to avoid a tax audit? These days, auditors tend to be nicer. They tend to be more educated than the collection officers. They do not want to send your case to the criminal division unless they have to. I have represented people who have taken phony deductions, and have left out income on their tax returns. During my career I have never had an auditor accuse my client of criminal fraud. In each case they were happy to make the adjustments and charge the taxpayer additional tax, interest and penalties.
Of course, you have to say things like….I forgot, or I guess I made an error, or I can’t find the proof for the deduction. You can’t say, “Oh yeah, my friend the accountant said I should put down a lot of expenses because there is less than 1% chance of being audited”. There may actually be a less than 1% chance of being audited in your case, but you have to be careful not to say you ‘willfully’ did anything you know was wrong in the preparation of the tax return. Got it? To this day I don’t know of anyone foolish enough to admit to ‘willfulness’. If you follow this manual, you will have very little to fear, unless of course you can’t document the items on your return and don’t want to deal with the increased tax liability.
There are two main types of audits. Correspondence and face to face. If any of these produces a tax liability, then the IRS sends you an examination report. You have 30 days to appeal it. In a face to face audit, the letter will ask you to provide information to back up certain items on your return. You may have to prepare two sets of proof. One directly responding to the letter, and another proving all the other items on your return.
Notice of Deficiency – This Is Not The End Of The Audit
Don’t be confused. The Statutory Notice of Deficiency does not require you to make an immediate payment nor is it a tax assessment. The notice is simply a proposed deficiency, which usually gives you 90 days (or 150 days if the notice was addressed to a person outside the United States) to agree with or file a petition with the U.S. Tax Court for a re-determination of the deficiency. Once issued, the time period in which you have to respond cannot be extended. However, during this period, you may ask for an appeal. The Notice of Deficiency can only be rescinded under certain circumstances and requires that both parties agree. Contact us if you receive this type of notice.
Once the audit is over, and you missed it. all is not lost. We can request an Audit Reconsideration. In many cases the IRS will open up the audit again, so that you can have a chance to present your proof for expenses, etc. An audit reconsideration may be requested if you subsequently obtain receipts you were not able to submit before.
I have represented people from other states without any problems. It is not necessary, or better, for the tax payer to sit face to face with an auditor to prove your income and expenses. You should not let the auditor into your home or office to conduct the audit. As a representative, I have yet to have the IRS refuse to have me send the information by mail when I have an out of town client. Locally, I don’t mind appearing with my client. We have a pretty decent audit group here in Houston.
Do you still feel that you are up to representing yourself in an audit? Call 713-774-4467 or email us at firstname.lastname@example.org before it’s too late.
Help Preventing An IRS Tax Audit IRS Audit Triggers, Tax Audit Red Flags, Etc. That Increase The Odds Of Being Selected For An IRS Examination.
Exaggerated Expenses – Many common expense adjustments come from medical, travel expense, entertainment expense, meals, vehicle, office in home, and the write off of personal computers, cell phones, uniforms, rent, and contract labor. If any of these are unusually high in relation to income, it will increase your chances of an audit. Understanding what draws the attention of the IRS will help prevent audit.
Mistakes – Don’t file a sloppy, incomplete, or illegible return. The agent may become suspicious of potential criminal fraud.
Consistency – Itemized deductions such as medical, charity, employee business expense, interest, etc. all must be reasonable, and consistent with prior years.
Some Audit Proofing Tips On What Must Be Done.
Prepare your tax return. Sit back and analyze it. Is it reasonable to have spent the amount you did on your expense items, given your current amount of income? If not, document the return with a sworn notarized attached statement, explaining the validity and purpose of the expenses. Then look at the prior years tax return. Is it reasonable to go from last year’s expenses and income to this years? If not, you may want to explain a few things to avoid an audit.File An Extension Of Time To File
You should always pay your taxes when they are due, either through quarterly estimates or withholding. If you file an extension of time to file, which allows you to file by Oct 15 , and you file right before the deadline, your chances of being audited are greatly reduced.
Willful non filing is a criminal offense, so please file your income tax return forms each year, even if you are late. Once you file your return, the statute of limitations for the IRS to audit you begins. The IRS has 3 years from the date you file or the due date of the latest extension, whichever is later.
I Received Tax Audit Letters, Or Notices In The Mail Types Of Audits
Face To Face – For an in house or field audit, it’s best to meet with the IRS at the place of business of your representative, or at the IRS. The worst place is your business or your home. It is easier to explain your return items in a face to face meeting.
Semi-Automated Compliance – Usually math errors and differences in third party reporting from the IRS’s matching program will cause letters to be generated attempting to adjust your tax liability. These letters are to be responded to with evidence that there should not be an unfavorable adjustment.
Correspondence (Mail Audits)(CP 2000, for ex.) – These letters identify items in question and a request to mail documentary proof to explain why you may have under reported income or over reported your expenses. You can mail the information in or request the audit be transferred to a local area office. You can better explain things in a face to face meeting.
You must comply with an audit request, or the IRS may summons your records, personally pay a visit to your home or office, call you, or visit neighbors and ask them questions.
Please contact us if you want assistance in resolving issues questioned in any IRS correspondence letters, IRS audit letter or Mail Audits.
Fear Of An IRS Tax Audit Exam? Your Best Tax Audit Defense Survival Guide
Carefully consider professional audit representation. Consider your audit adjustment exposure in relation to the CPA’s, Attorney’s, or Enrolled Agent’s fees for representing you. If you can’t find your receipts, how will you justify your expenses? Many auditors will disallow your deductions if you have missing or lost receipts. If you cannot back up the deductions you claimed, better than making up phony IRS audit receipts that the auditor refuses to accept, you should discuss alternative ways of documenting acceptable evidence, with a tax representative. A good tax audit defense advocate knows that you should never admit willfulness concerning the omitting of income, and errors of deductions. Your accountant should know the secrets of what is considered acceptable receipts, invoices (proof of purchase), business purpose, rules of evidence, and what items you normally don’t need receipts for.
WE DO! and you will too, when you become a customer of ours. Contact us now, for the audit relief you deserve.
Who Gets Audited?
- Individuals who file a form 1040 have personal tax audit.
- Large, small, and mid size business’ who file corporate 1120, partnership 1065, llcs, llps, etc. have business tax audit.
- Real estate audit, tax form 706 and trusts form 1041.
- Your retirement plan, contributions, etc.
- Any other entity who is required to file a U.S. income tax return.
How Much Time Does The Audit Process Take?
I have concluded audits in one day, though it is rare. At the other extreme, I’ve had audits last a year or longer. Revenue agents of the IRS will take the time they feel is necessary to conclude an audit. If the IRS feels they will get a large adjustment, decrease the odds of audit abuse, obtain public policy and other benefits, they will audit you till you stop them! Well, except for the fact that the assessment must be within 3 years of filing, unless they strong arm you into an extension.
If you don’t like the findings, you can speak to the manager. Then you can file an appeal with the auditor, addressed to IRS appeals. The auditor will then clean up their work papers, maybe make adjustments in your favor, and then send the appeal to the appeals division. See our section on audit appeals.
How Does A Face To Face Audit Work?
Your audit letter will list the items on your tax return that the IRS wants to examine. In my experiences I’ve found that it is a good idea to prepare two sets of documentary evidence. One based on the items in the letter, and another to support the rest of the return. Why? Auditors use statistical sampling guidelines. If they are not satisfied with the proof you provide, they will ask questions concerning the return as a whole. Make sure you don’t get caught off guard. You need to be the most prepared possible, for your protection. Never give the auditor your original receipts. If you don’t have all of your evidence with you, the auditor will draft a document request and give you 30 days to get the information. An audit adjustment report will be prepared, showing you the increase in tax, and the penalties added to it. If you decide not to present additional evidence, the audit examination report will be mailed to you with a 90 day notice of deficiency letter. This gives you the right to appeal or to go to tax court. prior to filing with IRS appeals, you can negotiate adjustments by contacting the auditor and the auditor’s group manager. Often you can agree to compromise on a reasonable settlement amount.
Tax Audit Questions? Solution…
Obtain a consultation with an experienced professional that does a lot of representation before the audit division. Have your tax audit questions answered. The goal of an experienced professional is to assess your exposure, which is how much money you can potentially lose. You can then discuss what it will cost to be represented. If the costs are reasonable in relation to the potential tax that can be charged to you, obtain the representation (assuming of course that you are satisfied with that person’s knowledge, personality, and experience). If you are willing to risk additional assessment, represent yourself. Do not try to bargain down the fees. You cannot predict exactly how much time it will take someone to represent you. Either do it yourself or pay for experienced IRS representation help.
- If you are considering hiring us, call Joe Mastriano, Houston Tax CPA 713-774-4467.
- Think your IRS matter is handled? Think again!
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Information on various common terms and areas of representation: