You received a letter from the IRS, and they selected your tax return for IRS audit. Naturally, you heart drops and you start to panic, most people do. What do you do? Why was your return selected? How do you respond? Do you need to hire help?
Learn the IRS tax audit process before responding. The reality, is that if you know what to expect and you’ve got nothing to hide, there’s nothing to fear.
Why was my tax return selected for an audit?
Generally, your tax return was selected because it triggered a red flag. The IRS believes there is a possible problem with your tax return.
The IRS uses a computer program to review all tax returns. The measurement used is called Discriminant Index Function (DIF) score. Tax returns will with a high DIF score will be put in a bucket. The IRS will select tax returns in the bucket for IRS Tax Audit.
Example – Taxpayer has an $100,000 job. The taxpayer donates to his or her local church. The taxpayer writes off $15,000 in charitable contributions on the tax return. The IRS computer program compares all tax returns with people making $100,000 and giving money to the church. The IRS determines that people making $100,000, on average, donate $5,000 to their local church. The taxpayer with an $100,000 job and donating $15,000 is above the average. This IRS tax return gets a high DIF score and triggers a red flag. This could result in an IRS tax audit.
We do not recommend reducing write-offs so you get a low DIF score. You should write off $15,000 donated to the local church if you keep records of the donations.
What are the types of audits?
- By-Mail or Correspondence Audit – The IRS will send you a letter asking for additional documentation. The IRS will request all documentation mailed to the IRS.
- Using the church donation example. The IRS is auditing the taxpayer that donated $15,000 to the local church. The IRS mail a letter asking for proof of the donations. If proof is not provided, then the IRS will remove the donation write-off and charge additional taxes. Simple, it’s done. If proof is provided, then the IRS will close the file. Again simple, it’s done.
- In-Office Audit – Your tax return will be assigned to an IRS Examiner or Revenue Agent. You will meet with the Revenue Agent at the IRS office.
- This type of audit is more complicated than the By-Mail IRS tax audit. The IRS believes there are multiple problems with your tax return.
- Field Audit – Your tax return will be assigned to a more experienced IRS Examiner or Revenue Agent. The IRS Revenue Agent will request to do the IRS tax audit at your home or place of business.
- This is the worse type of audit. The IRS believes there are MAJOR problems with your tax return.
- Random Audit – Your return was not selected for possible issues. The IRS randomly selected it. Your tax return will be assigned to an IRS Examiner or Revenue Agent. The IRS tax audit will take place at either the IRS office, at your home, or place of business.
- The IRS will go over everything reported on the tax return
What is the IRS Audit process?
- You are notified your tax return was selected for IRS tax audit.
- The IRS will explain your rights.
- A right to professional and courteous treatment by IRS employees
- A right to privacy and confidentiality about tax matters
- A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided
- A right to representation, by oneself or an authorized representative
- A right to appeal disagreements, both within the IRS and before the courts
- For By-Mail IRS tax audits, the IRS will requested that you provide proof with a due date. For all other IRS tax audit types, the IRS will set up an appointment with you.
- At the IRS tax audit meeting, the IRS will review your documentation. (Note: You may have one to many meetings)
- Depending multiple factors, it could take 30 days to 6 months to complete the IRS tax audit.
- The IRS will issue you a report of proposed changes
- You will have an option to agree or disagree with the report
- If you agree with the report, the IRS will bill you.
- If you do not agree with the report, you will have the option to appeal the decision or go to tax court.
Do I need IRS audit representation?
Your tax return was selected for IRS tax audit, because the IRS believes there is an issue with your tax return. You may or may not need the help of a CPA or tax attorney. It depends on the type of audit and whether there are issues with your IRS tax return.
IMPORTANT! If there are issues with your tax return, It is very important to talk to a CPA or Tax Attorney FIRST before you talk to the IRS.
Review the different types of IRS Tax Audits to help you determine whether you need IRS audit representation. In some cases you may need representation, in others you may not.
- Generally, you may not need IRS audit representation for By-Mail IRS Tax Audits. The IRS will ask for proof for one or two things on your tax return. If you have clear proof, then you do not need IRS audit representation. For example, you wrote-off $20,000 of mortgage interest. You can send the IRS a copy of Mortgage Interest Statement showing $20,000 of interest paid. However, if the issues are more complicated and/or you lack proof, then we recommend you hire a professional.
- You may or may not need IRS audit representation for Random IRS Tax Audits. The IRS did not select your tax return because of possible issues. The IRS randomly selected it. This type of IRS tax audit is comprehensive. The IRS will review everything on the tax return. A random IRS tax audit can be time consuming depending on the complexity of your tax return. If you have documents to support everything reported on the tax return, then you do not need IRS audit representation. Consider hiring IRS audit representation if you are aware of issues with your tax return.
- You should consider hiring IRS audit representation for In-Office IRS Tax Audits. Your tax return was selected because the IRS believes there is an issue with the tax return. The IRS decided the issue was big enough to assign your case to a IRS Revenue Agent. The Revenue Agent will focus on the problem areas.
- We highly recommend you get proper IRS audit representation for Field IRS Tax Audits. Your tax return was selected because the IRS believes there are MAJOR issues with your tax return. This is the worst type of audit. The IRS assigned your case to an experienced IRS Revenue Agent. The goal is to uncover all issues with your tax return. The IRS will expect to conduct the audit at your home and/or place of business. The IRS will review your business and home surroundings to determine if you reported all your income. The IRS will look at the business equipment, the cars you drive, home furnishings, kitchen appliances, TVs, and other items of value.
What is tax audit representation?
Tax audit representation, also called audit defense, is a service in which a tax or legal professional stands in on behalf of a taxpayer (an individual or legal entity) during an IRS or state income tax audit.
During an income tax audit or examination, the IRS and all states allow a taxpayer to have an authorized representative. The representative must have permission to practice before the IRS or state, and specific credentials are required. The types of representatives who are allowed to represent taxpayers before the IRS in income tax audits include attorneys, CPAs, and enrolled agents.
An audit representative develops the strategy used to defend the taxpayer’s position. He or she assists the taxpayer in preparing all documents requested by the taxing authority and typically attends all meetings and handles correspondence on behalf of the taxpayer.
What to do if you get audited?
Unfortunately, some unlucky people wind up getting audited.
Seventy percent of audits are just a letter asking for more information about your tax returns, and you’re asked to mail back forms proving your income or deductions. In other cases you’ll get an invitation to meet with an agent to discuss your tax forms, a scenario that sends many taxpayers into a panic. Well there’s no need to panic, but there are certain steps you should take.
Don’t ignore the letter
Ignoring the IRS is the worst possible thing you can do. The situation won’t go away.
While you should write back as soon as possible, you or your audit representative can ask for more time to gather the paperwork and forms. A two week extension is not an unreasonable request of your IRS agent.
Tell them what they want to know (and nothing more)
Only about 2% of audits are random; the rest of the time, the IRS has very specific questions it wants answered, and will request forms and receipts accordingly.
That means two things: Send or bring all the forms you’re asked to bring, and answer all the questions to the best of your ability.
That second point is important. Whereas keeping your mouth shut is usually best when you’re getting interviewed by the police, in an audit you’re usually best served by stating your case and answering all of the agent’s questions. After all, if the IRS is calling you in to talk about how much income you reported, it’s probably because the agency believes you’re underreporting. The audit is your opportunity to convince the IRS otherwise.
With that said, it’s possible to over share. This is not the opportunity to brag about how much money you made last year.
Negotiate and appeal
Once the audit is done, the agent will assess any taxes and penalties you owe. However, the assessment can always be appealed. The IRS may be willing to cut you a deal that will make you happy because they don’t want the case to drag on. This is another time where it pays to have good audit representation form an attorney experienced with tax negotiation. A good tax attorney will be skilled at escalating the case to make a settlement easier.
The IRS’ lawyers are ready to negotiate and will often settle cases before going to court.
Timeframes and conclusions
The duration of the IRS audit process can vary, depending on the specifics of your case. Much of the time leading up to the actual audit will depend on aligning your schedule with that of the examiner’s. It’s definitely in your best interest to be as flexible as possible, treating your audit with the utmost urgency.
Don’t be reluctant to schedule your examination because you’re convinced the outcome will be against you. You might think that when you hear the words “tax” or “audit”, they mean the same thing: you’re going to owe money. Not so. Bottom line, the IRS has mismatched information that you’re in a position to correct. All you need to do is provide the documentation that supports your case which, if you’ve been accurate in your filing, shouldn’t be a problem.
Get audit representation from Alana Tax Group
If you have received that dreaded letter notifying you that your return has been selected for an audit, do not fear! We have represented many clients in both personal and business tax audits. Even if you do not believe that you have done anything wrong or are unsure of why you are being audited, we don’t recommend that you attempt to represent yourself.
We will provide you the experience and professionalism when dealing with your IRS or State audit. For a personal audit it is important to understand that returns are usually selected for statistical reasons. By contacting us we are able to become a buffer between you and the IRS and/or State. If you have a business audit, it is important to understand your rights. Before you allow them to take computers, records, even enter your place of business, stop and understand your rights.
By contacting Alana Tax Group, we may be able to go into the audit office for you and we will have your case prepared and positioned to give you the protection you deserve. We know your rights and you have nothing to fear. If paperwork is missing we will help you put together all the documentary evidence you will need to come out of your tax audit successfully. Also most audits can be made via correspondence audits, so that there isn’t necessarily a need to appear. This allows us to handle a case across the nation regardless of your location.
Free Audit Resources:
Your Appeal Rights and How To Prepare a Protest If You Don’t Agree
Examination of Returns, Appeals Rights and Claims for Refund
