If you or your organization is selected for an IRS audit, the first thing to do is remain calm. An audit is simply a review of the accounts and financial information that have a bearing on your tax return, not an inquest. A certain amount of anxiety is natural when the IRS takes an interest in your return, but it need not be considered a crisis.
Your initial response might well be to wonder why you were selected. It could be one of several reasons, including the potential presence of an error in your return. Many individuals and organizations are simply selected at random, based on a statistical formula used by the IRS. There may also be an inadvertent discrepancy within your forms, wherein the information reported in your return does not match the information on records and forms provided by the payor or payors. Finally, some people or organizations are chosen for an audit because they are associated with a business or businesses that also were audited by the IRS.
The most important thing to remember if you are selected for an IRS audit is that you do not have to go it alone. You have the absolute legal right to authorized representation by a CPA, an attorney, or an enrolled agent. At Reliance Consulting, we like to think of ourselves as guardians of our clients’ financial well-being, especially when and if they need help sorting out an IRS audit. It starts with reassurance that all steps will be taken to help the audit proceed as smoothly and expeditiously as possible.
A major source of the anxiety associated with an IRS audit is unfamiliarity with the process. You should know that the IRS specifically delineates the rights of a taxpayer, and in cases of an audit, certain of these rights are particularly important to remember. They include the right to professional and courteous treatment by the IRS, the right to privacy and confidentiality, the right to know why the IRS asks for specific information and how that information will be used, and a right to appeal to the IRS itself and through the court system.
Neither the notification of an IRS audit nor the audit itself will be conducted via e-mail. After notification by phone call or through the postal service, the audit may take place by mail, or in the form of a face-to-face interview and records review. Depending on the type and scope of the audit, the meeting may take place at your home, your place of business, an IRS office, or at the office of your CPA. The IRS is responsible for informing you in writing what documents and records are required for examination. Audits vary in length, based on the complexity of the records and accounts under review. An IRS audit is not like a court case, in which the plaintiff who brings the suit carries the burden of proof. While the IRS will initiate the audit, the taxpayer must prove that the deductions and statements made on his or her tax return are true and accurate.
There are three conclusions possible in an IRS audit: no changes are necessary to the return; necessary changes are agreed upon by the IRS and the taxpayer; and necessary changes are not agreed upon by the IRS and the taxpayer. Obviously, if no changes are required, no further action is necessary on your part. If changes are necessary, and you agree with those changes, you will be asked to express your agreement by signing off on an examination report. You also will need to pay the additional taxes and accrued interest, if owed. If you disagree with the changes, you may enter mediation or request an appeal to resolve your differences without litigation. Involving the office of the Taxpayer Advocate at certain times is also beneficial, especially in cases involving financial distress or when you believe that IRS did not follow due process, either in dealing with your rights or the application of law itself. The Tax Court, U.S. Claims Court, local U.S. District Court, the U.S. Court of Appeals and even the U.S. Supreme Court are options if you are unable to settle the issue through mediation or by appeal.
Recently there have been instances where IRS agents have directly showed up at taxpayers’ houses or businesses and started conducting taxpayer interviews. Sometimes, even after presenting the agent with a valid Power of Attorney (FORM 2848), the agents have insisted that they deal with the taxpayers directly. Those IRS agents have been reprimanded for violating Section 7521(b)(2) of the Internal Revenue Code, which states that if the taxpayer clearly asks for lawyer or CPA representation during an interview, the agent shall suspend the interview regardless of whether the taxpayer may have answered one of more questions.
There is virtually no way to predict whether one tax return is more vulnerable than another to an IRS audit. One way to protect yourself is to rely on a well-established CPA for tax planning and tax preparation. The complexities of tax laws today make it impossible for the taxpayer to know all the intricacies that affect their tax situation. Having a competent CPA that can hold your hand and guide you through an IRS Audit can go a long way in ensuring that your rights as a taxpayer are protected and the application of law is fair and balanced.