I’m Being Audited…
What do you do when you open your mailbox and find a letter from the IRS saying you are being audited? Or receive a telephone call from someone identifying themselves as an IRS agent and informing you that you are being audited? How you proceed will depend on the type of audit and how you were contacted.
If contacted by telephone by an agent informing you of an impending audit, you do not have to provide, nor do you want to provide, information to them over the telephone. Simply confirm your mailing address and request to receive notification of the audit in writing.
There are numerous issues associated with IRS audits. You should know the different types of audits, strategies for handling audits, and your rights with respect to an audit.
Types of Audits
There are three basic types of audits: correspondence audits, office audits, and field audits. In a correspondence audit, you mail your records to the IRS. In an office audit, you bring in your records to the IRS for examination. In a field audit, the examination takes place at your office or your representative’s office. The IRS decides the time and type of audit, with the requirement that the arrangement be reasonable under the circumstances.
Know your Rights
You have the right to an explanation of the audit process and your basic rights at or before the time of your initial in-person meeting with the agent. Your other rights during the audit process include the following:
- The right to representation by an attorney, a CPA, or an enrolled agent;
- The right, with advance notice, to tape-record meetings with the IRS agent;
- The right to claim additional deductions you didn’t originally claim on your return.
Limit Direct Contact with IRS Personnel
Keep direct contact with IRS personnel to a minimum. The less contact you have, the less opportunity an IRS examiner will have to raise unexpected questions. Also, limited direct contact may help to keep the audit focused on the specified issues.
Avoid Particular Mistakes in your Dealings with the IRS
The following are mistakes you should avoid in dealing with the IRS:
- Ignoring correspondence from the IRS, or not adhering to instructions and deadlines;
- Proceeding before understanding your rights;
- Coming to an audit appointment without records or requested documentation;
- Projecting a negative attitude toward the IRS;
- Neglecting current tax obligations (e.g. not filing a current year tax return while dealing with an audit of a prior year tax return);
- Signing any documentation without fully understanding it;
- Omitting your Social Security number on documents and correspondence.
Practical Strategies for Handling IRS Audits
Consider doing the following in connection with an audit of your return:
- Volunteer little or no information to the IRS agent. Provide only the information requested and answer only the questions asked. The initial interview is scripted by the IRS and there are no random questions. The process provides the agent with a better understanding of the business or taxpayer, and identifies possible problem areas;
- Never lie, but never give an answer you are not absolutely sure is correct;
- Keep detailed records of the materials you submit to the agent, the questions asked by the agent, and the times of these activities;
- Settle the audit at the lowest level possible. This way, you save expense and avoid the likelihood of other issues being raised;
- Be thoroughly prepared. Agents generally don’t waste time conducting an in-depth audit if they see early on that a taxpayer’s records clearly substantiate the items claimed on the return.
Once the audit is over, make sure you understand why an IRS agent proposes to disallow an item on a return, to increase an income item, or to make other adjustments. Never accept an agent’s word on what constitutes the law. Agents aren’t experts on all aspects of the tax law. Remember, when you sign the examiner’s report, you are agreeing that you owe the specified tax. You can’t appeal the report within the IRS and can’t file a petition in the Tax Court. If the audit is completed and the agent proposes to disallow items to which you feel entitled, don’t sign the report. And, if you have specific questions or are having difficulty understanding the audit process or the proposed adjustments, consider consulting a tax professional.
Karen D. Crain, CPA/CFF, CVA, is a Tax Manager with Whittaker Cooper Financial Group. Contact her at (321) 723-3352 or Karen@whittaker-cooper.com