Last month, I began to explore the IRS audit process. I warned you 1) not to ignore a letter sent by the IRS, 2) to read the letter, 3) to get professional help, 4) that most audits are Correspondence Audits, meaning they are not going to request proof of every expense you made, but they need to verify one or two deductions that are statistically significant according to their computers, 5) to let your tax preparer know about the audit, 6) not to give up and 7) to stay positive. That article closed with a list of emotions you might go through. I am sure you can come up with a longer list if you have ever been through an audit.
Now, you are sitting in your CPA’s office. Unfortunately, he/she confirms the bad news. Your personal and business tax returns are being audited. Usually, one or two years are audited, but the IRS can add additional years if: 1) your records are a mess and unorganized, 2) you delay answering their questions or 3) if it appears to them that mistakes have been repeated in subsequent years.
Here are five rules.
Rule #1 – Don’t poke the bear! The IRS agent that is requesting documentation is not your enemy. He/she is another human being with feelings and a family, most likely. They have a job to do. Taxpayers are supposed to be truthful when preparing their taxes. However, human nature affects people in different ways, and the IRS has seen it all. Their main job is simply to verify the numbers on your return and that they represent reality not a fairy tale.
Rule #2 – Remember the Golden Rule. Treat other people (auditors) as you would like to be treated. All auditors have some professional leeway. If you treat them with respect and promptly answer their inquiries, they may give you the benefit of the doubt on certain items. Otherwise, it could cost you dearly.
Rule #3 – Face reality. If you are being audited, make it a priority in your life now. It won’t last forever. Sure, you could be doing something enjoyable, instead of digging through old files to find receipts. There are costs involved with an audit defense. Grow up. It is part of living in a civilized society. As an alternative, you could always go off-grid and be a doomsday prepper. If you pretend it isn’t happening to you, it could get very bad. Sticking your head in the sand never works, even for ostriches.
Rule #4 – Don’t Do-It-Yourself. If you did your own taxes for the year being audited, that could be part of the problem. If you are now faced with a full audit, you need the wisdom and assistance of an expert.
Rule #5 – Don’t be afraid to fight! Sometimes you can be a model citizen, but the IRS says you owe thousands of dollars. If they can’t explain why you owe what they say you owe, don’t sign the auditor’s report.
I won’t bore you with a summary of the audit process. Let’s skip ahead to try and resolve the conflict. You have just received Form 4549-A, Report of Income Tax Examination Changes. It shows adjustments made by the auditor and computes the tax consequence. Often, attached to this form are copies of the auditor’s workpapers stating their conclusion, followed Facts, Law and Argument. It represents their understanding of your situation for the tax year under audit.
If they caught a mistake you made, it was explained to you and you agree with it, then you can make the audit end by signing the audit report. Case closed.
However, there are options to consider if you disagree with the auditor.
- First, consider supplying the auditor with documentation that was missed or omitted in your initial response. Auditors, to their credit, will issue a Corrected Report of Income Tax Examination Changes.
- Next, you could request a conference call with the auditor to review the adjustments. Hopefully, you could explain your side and reconcile your differences.
- The next step is to request a conference call with the auditor’s supervisor. Because the auditor is personally involved with the reports they produced, some may not be receptive to reaching middle ground. Often, the supervisor is motivated to “make peace” with the taxpayer, especially if they agree to certain other adjustments and are willing to write a check today to make it go away.
- When that fails, Appeals is the next step. This requires completing and submitting Form 12203, Request for Appeals Review. Describe the items with which you disagree and explain the reasons for your disagreement. Your answer should include facts and your understanding of the law. Sometimes IRS auditors don’t comprehend the facts. Other times, they misapply the tax code. Fortunately, Appeals involves IRS employees with more experience who are not personally attached to the case. They may also perceive reality a bit better.
- Justice for the taxpayer may require a petition in Tax Court. It’s important to note, once a Notice of Deficiency is issued, the 90-day deadline to file a Tax Court Petition is written in stone.
- Finally, if you lose in Tax Court, the decision could be appealed to the US Court of Appeals.
In conclusion, I hope you are never audited. But if you get that letter from the IRS, make sure to get expert assistance. There are several people in Columbia like me that can help you with audit defense and tax resolution.
Aric Schreiner, CPA, PFS, is managing member of Columbia CPA Group, LLC.
