Some IRS Audit Basics
One of the prominent areas of my legal practice is taxpayer representation—and one component involves representing clients in tax examinations (audits) by the IRS and state departments of revenue. Fortunately, most taxpayers have never had a tax return examined by the IRS. But because IRS activity is picking up, I thought it might be useful to share some IRS audit basics for this month’s blog article. These same principles usually apply to state department of revenue audits as well.
How Do You Know Your Return Has Been Selected for Audit?
Generally, you will be notified by mail if your return is selected for audit by the IRS and/or a state department of revenue. However, some states have robust electronic platforms that maintain taxpayers’ individual and business accounts online, and taxpayers may consent to having communications (including examination notices) delivered to their email address of record. Always make sure that your mailing address is up to date with the IRS and your state department of revenue—and if you happen to live in one of the wonderful states with electronic notification, be sure to keep your email address updated with your state department of revenue as well. Follow up by regularly checking your mail and e-mail for notifications from taxing authorities. Failure to timely respond to a notice of examination can result in significant increases in the amount of time and costs associated with resolving your tax matter—and more importantly the loss of certain due process protections.
The notice of examination will include, at a minimum, the tax period being examined, the issues to be reviewed, a list of requested information/documents, the auditor’s contact information, and a deadline for contacting the individual or department handling the exam. Sometimes the notice will also include a request for a taxpayer interview with the auditor. Failure to respond to the notice of examination (by initiating contact with the auditor) within the stated deadline can result in adjustments to your tax return that increase your tax liability and assessments of penalties and interest. So always be sure to hire a representative as soon as possible once you receive that letter. If you choose to represent yourself, be sure to reply by the deadline on the notice.
What Are Some Areas Where a Taxpayer Representative Can Help?
My approach in any taxpayer representation matter, including an IRS examination, is to accomplish the best possible outcome for the client as efficiently as the situation permits. Both the taxpayer and the IRS benefit from a taxpayer representative’s involvement in a tax examination. The taxpayer has someone to provide only the relevant information and facts to the government and someone to communicate on his or her behalf. The IRS has a qualified professional to communicate with who speaks their language and understands how to present the information in a manner that is responsive to their requests. This saves time and effort for both the taxpayer and the IRS auditor.
How Long Do IRS Audits Take?
There are many variables that determine how long a tax audit will take. Some of these variables are the type of tax return involved (individual or business), the type of examination involved (i.e. correspondence audit, office audit, or field audit), the level of experience of the auditor, the number and complexity of issues being examined, the quality of the return the taxpayer filed, the quality of the taxpayer’s books and records, and the quality of the taxpayer representative hired to assist with the examination (or the taxpayer’s skills and knowledge if he or she decides to proceed without a representative).
The burden of proof is on the taxpayer to substantiate information reported on his or her tax return and these records should be maintained for at least three years (though I recommend six years as the IRS can assess tax for up to six years in certain circumstances). The better the quality of the taxpayer’s support for his or her income and deductions, the less stressful the examination will be for the taxpayer and usually the more efficient the representation will be for the tax practitioner.
What Are the Possible Outcomes of an Audit?
Audits have three possible outcomes: 1) the IRS could issue a “no change” letter in which the taxpayer’s return is accepted as filed, 2) the IRS could make changes to the taxpayer’s filed return for which he or she agrees, or 3) the IRS could make changes to the taxpayer’s return for which he or she disagrees. The first outcome, a “no change” letter, is the desired outcome in most cases. However, it is possible that a taxpayer representative could find additional deductions or credits during an examination and a refund could be issued by the IRS or state, so outcome #2 could also work out beneficially for a taxpayer. Additionally, in the course of the audit, the taxpayer could discover that he or she reported something incorrectly and acknowledge that the tax associated with that discovery is actually owed and no further assessments are made. That too would be a decent outcome in some cases.
Outcome #3, where the IRS makes changes for which the taxpayer disagrees, is the least desirable outcome. At this point the taxpayer will have to decide whether he or she is willing to spend the time, cost, and energy to appeal the case. If the taxpayer chooses to appeal, there is a short duration of time to pursue the next steps. At this stage the case is generally elevated to a group manager or appeals body, so it is almost always best to be represented in such a scenario so that the case is presented in a compelling manner to the reviewing manager or appeals body.
Thanks for reading this article! If your tax return has been selected for examination by the IRS or state department of revenue, and you are seeking some guidance on the process or would like me to represent you, please contact me using the form below.