by Michael Lodge
Every year millions of tax returns get submitted to the IRS and during that same year people get selected to be audited. The old saying is “The only two certainties in life are death and taxes”, and now the other word everyone hates to hear is “You have been selected to be audited”. The audit is a weapon used by the IRS to find more money and disrupt lives, so we have to be prepared that when you submit that tax return that you are prepared to back up what you have reported.
So lets go over what to do and not to do.
DO – the tax law is highly complex, use the tax laws to your advantage. The tax laws are so complex and so very confusing that your Congressman and Senator does not understand them, the IRS employees hired to enforce these laws don’t really understand them, and the tax practitioners preparing them do not know all of them, and Americans do not understand them. Some tax laws are very black and white, most of the vast tax laws are a shade of gray. This gray zone is where the tax audit is won or lost. You are not bound by the IRS auditor’s interpretation of the law (or fact) and you must be willing to challenge the IRS at every step of the process. You should never give in to the IRS simply because the IRS will not give in to you. Work with your tax practitioner who is an Enrolled Agent or CPA, they can do the research to provide support to your arguments.
DO – always be organized with your tax records, be patient during the tax audit process and remain focused. When you receive the letter from the IRS that you are being audited the IRS will identify which issues are subject to examination. You will know what they are looking at. A good example, in your tax return you filed a Schedule C – Business or Professions, you own a small business, this is where you report all of your income and expenses. All of your donations and other itemized deductions are reported on a Schedule A. You should look at each issue as a separate “mini audit” and organize all records around each mini audit. This will allow you and your tax practitioner to focus in on each issue and make sure you are organized with the appropriate records and documents to support your position. Make sure you use all of the time that the IRS gives you to complete all of the tasks. Key issue – remain patient during this whole process. The more that you appear to want to end the audit, the longer the IRS seem to take and the more detail the IRS explores. If your responses are organized, detailed and timely, and you are patient with the IRS – good results will often flow your way.
DO – Use all the time the IRS gives you to respond or gather documentation. The IRS relies upon its agents to handle a sufficient number of audits at the same time and expects each audit to be resolved with a certain time frame (depending on the complexity of the audit and type of audit). If you use all of the time available to you, this will allow the audit to proceed at an appropriate pace and may also give you a negotiating advantage if the audit starts to go too long from IRS management’s perspective. A good example, if the IRS gives you 30 days to get documents to its Auditor, use the entire time. If you need more time (legitimately – not to stall the process), you can often request an extension of time and these extensions, if used legitimately, are routinely granted. While the time element may seem like a small advantage, all advantages, however, small, should be utiliezed when your opponent is the IRS. Us time to your advantage through this audit process.
DO – Ask questions. Have a question on issues you are not clear of. My advice is to have an audit representative representing you, he/she can ask the appropriate questions in a more defined legal way and to record such answers from the IRS auditor. Questions are going to go back and forth between the Auditor and the Audit Representative, it is a two way street. The purpose of an IRS audit is to make sure that the filed tax return was/is substantially correct. This works both ways in that any mistakes, either in the taxayer’s favor or IRS favor, can be corrected at an audit. As such, an audit can produce a refund to the taxpayer just as easily (but not nearly as often) as an amount owed to the government. You are permitted to know why the IRS is asking any questions to determine if the information is even relavant to your audit. Questions are permitted to ask the IRS about your audit at any point in the audit, including questions concerning the audit process, the facts associated with your case, and how the IRS auditor plans on applying any tax laws to your return in question. Have your audit representative provide the IRS auditor with questions so that everyone understands the process.
DO – Know your rights. Make sure you sit down with your audit representative prior to the audit so you understand your rights under the law. Taxpayers have rights – the IRS does not. While the IRS may have the authority to do certain acts, only taxpayers have rights. However, if you are not aware of your rights, you are not going to be able to exercise these rights. For instance, taxpayers have the right to be represented by professional counsel at any/all stages of the audit process, can tape record the audit proceedings (with notice to the IRS), can appeal any and all findings to IRS management and the Appeals Division, and are permitted to ask questions, including the reason the tax return was selected for an audit. In addition, IRS employees who abuse their authority can be subject to civil sanctions. Review, with your tax representative, the Taxpayer Bill of Rights.
DO – have your tax representative file a FOIA – Freedom of Information Act letter with the IRS to obtain all of the auditors work papers. This way when you get to the point where you are going to appeal the case you will know what the IRS auditor is using against you. This may take some time but it is vital that every tax practitioners when representing a tax client on an audit through the appeal process to file a FOIA with the IRS.
Now it is time to go over the Don’t part of the audit.
DON’T – Never volunteer any information to the IRS. The key word here – NEVER. Live by it. The IRS has some information about you prior to the audit, including your tax returns being examined, where you live, your income and some other basic financial documents. It does not have much information, and in face has much less information than you may suspect. IRS agents often use an audit interview to gather additional information about you as they can. The more information that the taxpayer discloses, the more opportunities the IRS agent will have to find tax issues to examine. Going against taxpayers here is the fact that most taxpayers are very scared when they are sitting in an IRS agent’s office. When people get nervous, they typically talk too much, especially in the silence of an IRS audit. Do not give in to this tactic – answer on the questions that are asked and nothing more. Answer only questions pertaining to the audit – nothing more.
I did a blog several months ago about how the IRS is now looking at your social media pages to gather information. The IRS has developed an entire system that goes out and gleams information about you. So if you are claiming you only made $10,000 a year on your tax return but you are posting pictures of buying GUCCI and LV bags, new cars, the IRS wonders how you can afford these things on your salary. So just remember whatever you post on social network sites about you – the IRS can see that also.
DON’T – Never lie to the IRS and never even think about bribes or threats. It is very tempting to alter receipts or invoices, or your accounting system or other documents you are providing the IRS, this information that you know is not accurate. Do not do this under any circumstances. If you are caught, it will turn the civil audit into a criminal case. It is not important to most audits that your receipts may not match percisely with your tax returns – but they should be close. Example, your tax return may claim $2,300 in charitable contributions but your receipts may only total $2,200. In many cases, the $100 difference will not be an issue and may not even result in an adjustment. But if you overstate the deduction with no documentation to justify the deduction – this will be an issue because you misstated your tax return. Consult with your audit representative prior to any document submission to the IRS.
DON’T – Never every trust the IRS or any of its employees and representatives. The IRS makes public claims (“provide American taxpayers with quality service”), the IRS is in business to collect tax revenue. The IRS and its employees are not charged with looking after your interests. Your interests as a taxpayer often directly conflicts with the IRS employees’ goal of assessing and collecting additional tax revenue. Unrepresented taxpayers often misinformed about the tax laws, to their financial detriment. Many IRS employees are very honest and not all interested in cheating taxpayers. However, it is often difficult, if no impossible, for the average taxpayer to know which employees to trust and which should not be trusted. Given the nature of the stakes involved in an audit, it is bet to not make any mistakes and simply assume the IRS employee can not be trusted. Treat the IRS employee with the utmost professional respect and research every proposed adjustment of the audit before agreeing to any changes to your tax returns.
DON’T – Never meet the IRS at your home, unless required. Many tax audits today are done by correspondence/mail with the IRS and you would not need to meet with an auditor in person under these circumstances. However, when the IRS conducts a field audit, they will want to meet with you and/or your representative. Always – have a representative. You have the opportunity to choose the location and you should not choose your personal home. Offer to meet the IRS at the IRS agent’s office, your business location, and the best place is at your audit representative office. Never at your home where the auditor can gleam more information about you. Best place – the audit representatives office.
DON’T – Do not ever fight the IRS alone – hire an audit representative that has the experience in meeting with the IRS, you have given them power of attorney to represent you and put your documents in format the IRS can understand. If you decide to represent yourself, make sure that you believe you have the competence in your ability to research the tax laws, deal with the legal and bureaucratic complexities of a tax examination, and otherwise handle all phases of the audit. If you decide to represent yourself and later determine that this was a mistake, you are permitted to ask the IRS to stop the examination to allow you time to secure a representative – THIS IS YOUR RIGHT!
FINAL – An IRS audit can be won, but only if you know your rights and know how and when to assert them. Hire a tax audit representative that knows how the system works and has the ability to research the tax law or the gray areas of the tax law that can help you.
If you are being audited or need tax advice send an email to: firstname.lastname@example.org
Thank you for the article written by Scott M Estill for his article “Be Prepared For When You Get Audited by the IRS. Mr. Estill is an attorney with Estill & Long, LLC.