IRS Audits and Kiplinger’s Retirement Report

Posted on June 10, 2010. Filed under: IRS Representation | Tags: , , , |

The following post is in response to an inquiry (denoted in bold lettering below)  from Kiplinger’s Retirement Report on IRS examinations (italicized below).  Our special thanks to Kathryn Watson of Kiplingers for her attention.

How are people typically notified of an audit?

Individuals can be notified of an audit in a variety of ways. With regards to individual income taxes, IRS audits or examinations take many forms. The least intrusive is a correspondence audit. Typically, a correspondence audit is where the IRS will send out a letter or notice inquiring of certain items reported. The most common reasons include mathematical corrections or discrepancies or omissions between amounts reported on an individual’s federal income tax return and amounts reported by third parties to the IRS. In certain cases, the IRS will have a more comprehensive examination whereby an examiner will meet personally with the taxpayer or taxpayer’s representative and review supporting documentation for income and expenses reported on the individual’s federal income tax return.

For what reasons are retirees typically audited?

Retirees are typically audited or examined for the same reasons that other individuals are examined excluding the examination of earned income. The selection may be as simple as the correction of a mathematical error or may be more involved. As an individual taxpayer, the other most common forms of selection include the omission or misstatement of amounts reported to the IRS by others. The sources of income for retirees is most commonly social security income, dividends, interest and capital gains. Current tax law procedures require the reporting of portfolio income (interest, dividends and gross proceeds received on the sale or disposition of securities) by third parties. In turn, the IRS “matches” the amounts reported by third parties to that reported on individual income tax returns.

Does an audit mean you did something wrong?

Being selected for examination does not necessarily mean you’ve done something wrong. In the cases where mathematical inaccuracies are reported, or amounts reported by third parties to the IRS do not “match” to amounts reported on an individual’s federal income tax return, typically the IRS will propose an adjustment for the taxpayer’s review. If the taxpayer does not agree, the taxpayer can indicate so and provide documentation of their position for reconsideration. In other cases where a face-to-face examination is required, taxpayers should be prepared to offer documentation in support of their position.

How do audit representatives such as yourself help people navigate the process?

Audit representatives are paid professionals specifically trained or qualified with tax law and procedure. Typically, taxpayers will engage the services of a tax attorney, certified public accountant or enrolled agent that have the requisite background and knowledge for IRS representation. Hiring a professional places a taxpayer on somewhat equal footing with that of the IRS, where a professional can help to secure and protect an individual’s rights. Qualified audit representatives understand the audit process, understand the nature of what is being examined, understand what’s necessary to support tax positions, understand how to best negotiate settlements and payment options on behalf of the taxpayer, etc.

How should someone organize paperwork for the audit?

To begin, an individual taxpayer should meet with an audit representative and provide a copy of notices, letters and other correspondence, a copy of the tax return under examination and supporting documentation used in the preparation of the return at a minimum. Under provisions of the freedom of information act, a taxpayer or licensed representative will typically acquire certain key information from the IRS related to the taxpayer’s account. This information will include an account transcript which provides the status of the account, taxes assessed, tax credits, payments and significant dates relative to assessments and collections. Similarly, a wage and income transcript will provide the details of amounts reported by others to the IRS that should be included or match to amounts reported on an individual’s income tax return.

What are the biggest mistakes people should avoid?

Perhaps the biggest mistake to avoid is avoidance (not opening the letters, ignoring deadlines, being unresponsive). While the taxpayer is doing “nothing” the IRS is following procedures that increasingly limit the rights of the taxpayer through a mere passage of time. Limitations that will limit the ability of a taxpayer to appeal an IRS decision, limitations to take matters to tax court, limitations to get a refund, limitations on penalties, interest, etc.

The second most common mistake is self-representation. Many taxpayers go into an 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. If you are selected for an audit, you will probably need professional help. Taxation is very complicated and technical and you will likely benefit from having a professional on your side.

Hello Mr. Helfer,

I came across your website through the ASTPS website, and I’d like to interview you for an article about audits.

For some background… I write for Kiplinger’s Retirement Report, a newsletter that goes out to about 80,000 subscribers around the country. They are primarily retirees in their 60s and 70s. My article for our July issue will provide advice on what to expect if you’re audited. My questions include: How are people typically notified of an audit? For what reasons are retirees typically audited? Does an audit mean you did something wrong? How do audit representatives such as yourself help people navigate the process? How should someone organize paperwork for the audit? What are the biggest mistakes people should avoid?

If you’re interested in speaking with me, please call me on Thursday at the number below. I shouldn’t take up more than 15-20 minutes of your time.

Many thanks!

Kathryn Walson, Staff Writer

Kiplinger’s Retirement Report

1729 H Street, NW

Washington, D.C. 20006

phone: 202-887-XXXX

fax: 202-785-XXXX

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