The IRS has the legal right to audit any tax return it so chooses for any reason it chooses. The threat of an audit is what makes most taxpayers take seriously their obligation to comply with the letter of the law.
The odds of being audited are generally very low; therefore, if you get an IRS audit notice, you should take it very seriously. The IRS is required to have a good reason for selecting you for a tax audit.
It is probable that the IRS selected your return because its computer system scored it as having a high likelihood of inaccuracy and an IRS official reviewed it and decided that it should be examined.
Burden of Proof is on Taxpayer in IRS Audit
What makes an IRS audit so frightening is that the burden of proof is on the taxpayer to show that he has included all of his taxable income and provided receipts for all of his tax deductions.
It is not enough that your return is accurate. You must be able to prove it is accurate. Contact us today for help.
IRS Penalties are Severe
If your return was selected and the conduct of the audit is not handled properly, the following might occur:
- An IRS accuracy related penalty will be assessed (20% of the underpayment)
- An IRS substantial understatement penalty will be assessed (20% of the underpayment)
- An IRS civil fraud penalty will be assessed (75% of the underpayment)
- A IRS criminal referral will be made
- The IRS will expand its audit to other tax years
- The IRS will expand its audit to related taxpayers
- The IRS will contact third parties about your tax return
An Experienced Tax Lawyer, CPA or IRS Enrolled Agent will help you lower your Taxes and Avoid IRS Penalties
The presence of an attorney in the audit process will help you avoid making statements or presenting documents to the IRS that may cause the IRS to assess additional taxes, penalties or interest against you.
Because of these risks, it is highly recommended that you hire a qualified, experienced tax attorney or CPA or IRS enrolled agent to represent you in an IRS audit.
More important, by having a tax attorney involved early in the IRS audit process you are putting the IRS on notice that: a) you believe your tax return is correct as filed; and b) you are prepared to prove it in Tax Court if necessary.
10 Dos and Don’ts for Dealing with an IRS Audit
With the possible exception of a few extreme masochists, nobody likes to be audited by the IRS. But it happens every day and it could happen to you. Here are The Pappas Group’s 10 tips for dealing with an IRS audit:
- Do contact the IRS auditor immediately and let him or her know that you intend to cooperate – Cooperation counts. When you resist the process or act indignant, the IRS auditor assumes you have something to hide.
- Do consult with your tax preparer to discuss your return and the potential high risk areas – If you had your return prepared by someone else, have that person go over his file with you and explain how he arrived at the numbers included on the return. A reputable tax preparer should not charge you for this.
- Do assemble your records by year and category of income and deduction – Organization and preparation greatly increase your chances of a favorable outcome.
- Do consult with a tax lawyer or CPA or IRS enrolled agent experienced in representing taxpayers before the IRS audit division – Handling an audit by yourself is dangerous. The process is rife with risks. See number 8, below.
- Do be respectful and understanding towards the auditor at all times – It never hurts to be liked, but it could be fatal to be disliked. But don’t be too nice or the IRS auditor might thing you’re trying to bribe her.
- Don’t get angry – This is counterproductive and it will distort your judgment.
- Don’t accuse the IRS of harassment – No one ever won an IRS audit because it accused the IRS was being a pain in the butt. This is a useless argument unless, of course, the IRS auditor is way out of line. If that occurs, you should go directly to his group manager or supervisor and lodge a complaint.
- Don’t try to handle the IRS audit alone – Many taxpayers hire us after they have attempted to handle their tax audits by themselves. In these cases our fees are greater because we have to undo the damage already done by the taxpayer.
- Don’t lie – This could result in an IRS criminal referral or the imposition of IRS civil fraud penalties, but almost certainly will hurt your chances of a favorable resolution of the IRS audit. Also, lying to an IRS agent will probably cause him to expand the audit to other tax years.
- Don’t sign anything without first consulting an experienced tax attorney – Even if the IRS auditor asks you to sign something, don’t do it without first speaking to a tax attorney or experienced tax CPA or IRS enrolled agent. The IRS auditor must allow you to consult with a tax advisor whenever you request it and especially before you agree to any IRS tax adjustments or IRS statute extension waiver.