Audits – There is Nothing to Fear
Relax! If you’re stressed out by the thought of an audit, that’s the way the IRS wants it. I’ve had the bravest among us walk into my office scared to death after receiving an audit notice. And some of my clients are absolutely convinced they are going to jail.
But I’ve never had a client go to jail due to tax fraud. I’ve had clients that have done some pretty egregious things, but still no jail time. You see, it’s more likely you will be swallowed up by a sink hole than go to jail. In my experience what the IRS wants more than anything, even when there is arguably fraud, is your money! The government wants to get paid.
I’ve even had clients who managed to “forget” that they earned substantially more than they reported on their tax return, but they did not go to jail when the IRS discovered this through an audit. In fact, some of them paid only a small penalty. Like I said, audits can usually be handled without much fanfare. However, it’s vital you take the right approach or you could be in for a world of headaches.
First, understand that a tax return—no matter how complicated—has two parts:
- Amount of income. Example: gross income.
- Reduction to income. Example: mortgage interest.
In an audit, the IRS focuses more on income than expenses. Keep in mind that the stated purpose of an audit is to verify that your tax return is correct. Yet is that the reality?
No. The unstated purpose of an audit is it’s to be a collection tool. The IRS will never admit this of course, but that’s the reality.
Three basic types of audits:
Correspondence Audit. By the far the most common. It’s the IRS asking for documentation relating to specific items on your return, and you communicate by mail.
Office Audit. The IRS invites you to their office to review your return. You will meet with a revenue officer (also known as a tax auditor).
Field Audit. The IRS wants to come to your home or business and review documents and look around.
The Taxpayer's Right to Legal Representation
You have a right to have an attorney appear at the audit for you. One of your most important IRS rights is that of legal representation. As a tax attorney, my job is to insulate my client from the IRS. Once you have retained my office, all phone calls and letters go through me. I do the talking, not my client.
Internal Revenue Code Section 7521(c) requires the IRS to conduct the interview with your legal representative, not you. You do not have to attend the audit. I meet with the IRS instead of my client, and I alone handle all audit questions for my client. If you are represented by legal counsel, you do not have to attend the audit nor meet with the auditor. That’s your tax attorney’s job.
Audit Facts that May Give You Peace of Mind
Fact: Besides having the right to have your lawyer speak for you, taxpayers can often turn an office visit audit into an audit by mail.
Fact: You can record an audit. You must give notice ten days before the meeting.
Fact: You can have an audit’s findings reconsidered even after it’s concluded. Audit findings can always be appealed in tax court.
Fact: You can prove expenses and deductions without receipts. There are well-established cases on the issue. See Cohan v. Commissioner and Gizzi v. Commissioner. Affidavits are extremely effective in reconstructing missing records. The burden is on you to show that the return is accurate. However, the burden is “substantial compliance” and if your records are incomplete, you may still be in compliance.
Fact: You can claim many business deductions without receipts for expenses.
Fact: You can, and should, make the IRS put any request in writing. If the agent phones me with a request, I politely ask that they put that request in writing. You might be amazed at how often the Agent forgets about the request.
Fact: Any requests for information must not be vague or overly broad and you can respond in writing to make the request more specific. The IRS is required to tell you why they are requesting information. It is very possible to successfully challenge document requests.
Fact: The auditor (Revenue Agent) simply makes recommendations as to changes in your tax return. The agent will create an examination report and if you do not agree with it, you can present more information. And you can ask to meet with the revenue agent’s supervisor. (And, you can always appeal.)
Fact: The savvy tax professional can negotiate what is included in the examination report. In other words, if it’s clear that you are going to owe the IRS based on uncontroverted audit findings, you negotiate a lesser amount with the agent.
Audits can be scary business, so understanding what the IRS can and cannot do, as well as the things you can do to neutralize the IRS, makes the audit suddenly not so scary after all.
If you need audit help, relax, and call me any time.
800 695 0525 or 414 771 9200