Dealing With an IRS Audit
Less than 1% of all individual tax returns are audited. Don’t let that number fool you, you should never ignore the risk of an IRS audit. Sophisticated software designed by the IRS identifies and flags tax returns with potential audit adjustments. Every return is run through the software and if the return trips certain triggers then it may be selected for audit. If you claim the earned income tax credit or operate a sole proprietorship then your risk of being audited is much higher than if you are merely an employee. So if you receive an audit letter from the IRS that means the IRS believes your return contains potential errors. Right off the bat, you are playing defense with the IRS, even if your return is 100% correct!
What are the chances of being audited?
As I said earlier, generally only 1% of all individual tax returns are audited. The IRS rarely conducts random audits anymore as it relies upon its software to identify returns with the most potential for additional revenue. Your audit risk varies depending on your tax return. For example, if you operate a business and claim the earned income tax credit your audit risk increases to 2.5%. 2.5% you say, who care?! Sure the risk is low overall but consider that you are now 2 1/2 times to be audited than someone who just earned a regular wage.
Still feeling safe? Don’t be. The IRS will often conduct audits based on information provided by informants or as a result of investigating shady tax preparers. Ex-spouses and ex-business partners are more than willing to report you to the IRS. Imagine how awkward that audit is going to be!
Finally, the IRS mails out auto-generated notices that request additional information regarding something on your tax return. The IRS uses a matching program which collects information off of W-2s and 1099s and if your return does not match the IRS records (say you omit a W-2 by accident) you may receive a letter from the IRS asking why the income is missing. These letters are not audits in the traditional sense but the result may be the same: additional revenue for the Treasury.
Understand that while your audit risk overall may be low your tax return may contain information that puts you at a higher risk of being audited. So you should always prepare your return expecting to be audited.
Types of Audits?
Depending on the complexity of the tax issue, the audit may be conducted by mail, called a correspondence audit, or in person, a field audit. IRS audits are generally restricted to certain areas on your tax return, for example, business expenses or charitable deductions, and to specific tax years. The key to defending an IRS audit is to provide the information requested that supports the claimed item and to not provide the IRS a reason to expand the examination. A careless statement or poorly prepared response may give the auditor the ammunition he or she needs to audit additional years or request support for other deductions on your tax return.
What happens when I’m being audited?
As I said above, there are two types of audits to be concerned about. First a correspondence audit which is an audit done over the phone or through the mail. Typically these types of audits deal with only one or two particular areas on tax return, such as mortgage interest or charitable deductions. It doesn’t mean that it is always restricted to one or two items but this is typical what happens. Often times the audit can be done without the taxpayer ever see the IRS agent or perhaps even speaking to one. The IRS agent will often request the taxpayer provide certain information by mail to the IRS officer and after examining the materials provided the IRS agent will either close the case or recommend an audit adjustment.
Field audits are those were the IRS agent personally makes contact with the taxpayer whether at the taxpayer’s office or at the IRS local office. These cases are much more complicated than a correspondence audit and as such if you get a field audit then you should expect to have to provide more documentation to the IRS and to potentially be interviewed by an IRS agent.
What do I do if I disagree with the IRS officer?
If you disagree with the IRS agent then you will have an opportunity to have a hearing before Appeals. At IRS Appeals, an appeals officer who will listen to your case and determine on an independent basis whether to agree with the IRS or to rule in your favor. If you are still not satisfied then you can go to Tax Court or Federal district court.
Appealing your case may seem like an act of desperation but often times the matter gets settled in a manner fair to you. Appeals officer’s are usually experienced IRS agents and who understand the risks of litigating these matters in court, which provides a fertile ground for finding compromises. Everyone’s case is different and so you may find that one unsympathetic appeals officer but if you have either good facts or a sympathetic story than you stand a good chance of getting a good result.
Do I need a tax attorney if I am being audited?
Maybe. Two reasons you want to hire a tax attorney: if the tax issues are complicated or if the IRS thinks you may be hiding income or exaggerating to deductions. If either shoe fits then you may need a tax attorney in your corner! For example, if the IRS is auditing a deduction totaling several thousand dollars then the cost to hire an attorney doesn’t make sense. In that case, I can assist you indirectly by providing advice on what you should do or to explain the process through a one-time consultation. From there you can handle the audit yourself.
If, however, the IRS audit may result in significant additional taxes due then a tax attorney or other professional may be necessary to avoid any negative tax consequences to you. By hiring me, I will act as your agent and advocate with the IRS. Before the IRS ever receives your response, I will sit down with you and examine your return to identify the strengths and weaknesses of your case. Once that is done, we will work on preparing a response that hopefully will satisfy the auditor. If I identify any weaknesses in your case, I will explain your options and how best to minimize any damage that might result.
If you find yourself being audited, you should call me at 207-299-0515 or email my office using my contact form for a free initial consultation. Don’t spend another night worrying about your taxes, get help now!