What to Do When You Receive the IRS Audit or Examination Letter

Posted on April 5, 2010. Filed under: IRS Representation | Tags: , , |


Who Gets Audited

Your probably going to begin by saying why me? Thousands and thousands of taxpayers get audited annually. You’re not the only one. Don’t take it personally.

Most IRS examinations can simply be referred to correspondence examinations where the IRS has reviewed your return and has determined that certain errors exist. These errors may be mathematical, or commonly the failure of the taxpayer to include certain sources on income in the filing of the return that were reported to the IRS by others. There is no reason to panic! Begin by carefully reading the IRS letter you receive. In most cases the IRS will recalculate your tax liability and propose an adjustment for your consideration.

If you agree with the changes that are proposed, and the additional amounts due appear reasonable and within your reach, simply confirm your agreement with the proposed changes and pay the tax assessment.

If you don’t agree with the changes that are proposed, gather the necessary documentation in support of your position. Be sure to pay clear attention to the date for which your response is required.

If you don’t understand the proposed changes, you may begin by contacting the tax professional who assisted you in preparing your return. If you are uncomfortable with this individual, or otherwise find it necessary to choose another, choose a tax professional with the qualifications and experience necessary to properly advise you.

A second type of examination is where the IRS has selected your return because statistically you appear to represent a profile that the IRS is most interested in. This may be due to the fact that your business or profession is one of interest, that your income or deductions are inconsistent with that of similar taxpayers, that your reported deductions appear unreasonable in light of your income, that your reported income or deductions appears unreasonable based on amounts that your have previously reported, or even that your tax returns were prepared by an individual or firm that has been identified as problematic, etc. Whatever the reason, your have been selected for an examination. This type of examination is generally more comprehensive in that it will generally not be limited to specific areas of your tax return.

A third type of examination may be referred to as a random audit. Lucky you! This type of examination is generally fully comprehensive in that all aspects of your tax return will generally be examined. The audit will primarily concentrate on your tax return deductions and a careful review of the supporting documentation. Sometimes it appears that the IRS will simply perform such examinations as a training mechanism for new recruits.

What to Do if Your Being Audited

Pay close attention to deadlines! The IRS is limited in time in which to collect from you. Similarly, your rights to disagree and certain options to exercise your rights lapse as well. Allow enough time to deal gathering information and responding. Don’t hire a professional the day of your schedule examination!

Be proactive! Be sure to show that you are responsive. Doing nothing is the wrong way to go! Your responsiveness clearly indicates that you acknowledge that a problem exists and that you are dealing with it. If you need additional time, ask for it! Similarly, you can ask for second or third extensions with generally little resistance. The ability of the IRS to collect from you is quite lengthy and they will generally patiently wait it out.

Get professional help! Taxation is very complicated and technical and you will likely benefit from having a professional on your side. Many taxpayers go into audit totally unprepared and hope for the best. Some think that if they can impress the auditor that they are nice, law-abiding, decent human beings and not common criminals, the IRS auditor will mellow, be sympathetic, and politely let them off the hook. Forget it! Tax auditors are nice, decent human beings too, but most importantly, they pay their taxes. And they don’t think too kindly of others who don’t.

Hiring a Professional

Professional representation is usually best performed by tax attorneys, certified public accountants and enrolled preparers. It is most important that you inquire and gather information necessary to make an informed judgement as to the qualification of the individual or firm that will be representing you. Your tax preparer may not be the one best qualified to represent your interests. Inquire as to professional credentials, education and experience.

Hiring a professional may be costly. Not hiring a professional may cost your even more! Experienced tax professionals will generally outline the cost of their services, or whenever possible, provide you with a reasonable estimate before beginning any work for you.

What’s Involved in an IRS Audit

The phases of every IRS audit engagement will generally include:

  • gathering information from both you and the IRS examiner,
  • making professional determinations as to the accuracy and completeness of your tax returns, potential areas of exposure and likelihood of your success,
  • attending examination meetings and teleconferences,
  • reviewing and responding to document requests,
  • maintaining clear, concise and organized file of what happened and when, and
  • appeals of any potential examination differences

This can be tedious, time consuming and often overwhelming for the layman. Experienced professionals have gained proficiency in gathering information, performing technical analysis and representation in the most efficient manner. This results in increased profits for them and maintaining low, competitive fees for you.

What to Do in An IRS Audit

The IRS examiner has a job to do. Respect it! Be courteous and professional. Always.

Don’t try to make friends with the IRS examiner. The examiner is not your friend. The examiner is protecting the interests of government in tax assessment and collection. The examiner will most always be objective so as not to favor you over the next guy. Making friends with the examiner will not help. Making enemies with the examiner will just make things worse.

Clearly state your position and provide supporting evidence. This will include cancelled checks, bills, bank statements, credit card statements, activity logs, etc. Third party evidence (not prepared by you) is best. If you have it, great! If you don’t, don’t make it up! You will most always get caught. Lie on one matter, and everything else you present will be suspect. Know where to choose your battles.

Try to limit the examination to specific items of concern. Don’t help the examiner to go on a fishing expedition. An inexperienced examiner will often not know what to look for, or more accurately stated, not know which are the key areas of concern. That’s not your problem! That’s his! Limit your responses to what’s being asked. If its clearly irrelevant, say so. But let the examiner make the final determination of what’s relevant and what’s not.

Don’t volunteer information. The more you say, the more likely you’re going to put your foot in your mouth. Answer questions accurately and to the point. If you don’t know the answer, just say so. Its reasonable to need additional time to gather additional information. Its understandable that your representative may not know all the answers like you would.

Be organized! Don’t show up with a box full of receipts, bills, etc. When asked a direct question, have the information readily available. Don’t hunt for the information during an examination. Don’t bring documentation that you don’t need. This can only hurt you!

Take notes. Good notes. You may have to review this information again later. IRS examinations often take a long time to finish. Don’t rely on your memory for what you were asked, how you answered it, or what documents you provided.

Follow up. IRS auditors have tremendous case loads and only limited time to work on yours. Set deadlines and follow up. If you don’t hear back, follow up again. In writing!

Its not over, until the fat lady sings! Don’t rely on representations made by the examiner. The examiner can only make recommendations. The recommendations will almost always be subject to approval by others. When the audit is completed all changes must be in writing. Signed, sealed and final.

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