An IRS audit is a review/examination of an organization's or individual's accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.
There are two common taxpayer concerns. So, let’s look at what really goes on when the IRS decides to audit you. We’ll look at the two primary issues in every audit:
• Did you report all your income?
• Were you entitled to the deductions, exemptions, and credits claimed?
IRS Publication 17, (herein referred to as “Pub 17”), “Your Federal Income Tax”, explains the audit process—from the IRS point of view. See Pub 17 for English or Spanish. For more information also refer to IRS Audits on the IRS Website..
Contact us at PW E.A. Tax Services, Inc., if you need assistance with the three types of audits conducted by the IRS: mail(correspondence), office, and field audits.
Mail (correspondence) audit:
The most successful outcome requires a timely, complete response to the IRS on the issues presented. Late or incomplete responses usually result in the IRS assessing additional taxes, penalties and interest that is difficult to reverse. To reverse premature IRS assessments, taxpayers must ask the IRS for audit reconsideration.
Solution: Mail audits are generally not in-depth examinations and focus on a few identified issues. The solution for mail audits is to provide the right response in a timely manner that best represents your tax return positions
Mail audit response and follow-up:
Mail audits, like CP2000 notices, require that you respond timely to the appropriate IRS correspondence exam unit and address each issue with documentation and explanations outlining your tax position. These responses also require you to address penalties and request an appeal should the IRS disagree. If the IRS requests additional information, you will need to respond timely and provide adequate legal explanations on your tax return position.
Face-to-face audits have the most risk
Office and field audits are conducted face-to-face with the IRS. In these types of audits, the IRS is auditing both the tax return and the taxpayer – this means the IRS is looking for unreported income and testing the taxpayer’s intent to file an accurate tax return. Field audits are often performed on business, international, and wealthy taxpayers and are very complicated and comprehensive. Be aware field audits are the most comprehensive, requiring much more diligence, preparation, and interaction with the IRS. Taxpayers should rarely represent themselves before the IRS in face-to-face audits.
Solution: Face-to-face audits are intrusive and require thorough planning, presentation of facts and tax law position to the IRS, and procedural rules to obtain the best outcome. In a face-to-face audit, you are much more likely to have to appeal the audit findings.
Face-to-face audit representation
A CPA, enrolled agent, or attorney can act on your behalf and advocate for you in any IRS audit. The representative becomes your “power-of-attorney” and is able exclusively speak to the IRS on your behalf. Taxpayers should rarely represent themselves in these most complicated, and often costly, of IRS audits. The tax professional will deal directly with the IRS agent during the exam and provide them information and tax return position. Success face-to-face audits require extensive preparation and analysis of the taxpayer’s finances, business, and tax return positions. The CPA, enrolled agent or attorney will be able to conduct a pre-contact analysis of important financial records such as your bank statements and business records to best present your situation before the IRS. The representative will interact with the IRS throughout the audit process, including any appeal on disputes that you may have with the IRS auditor.
If you do not agree with the results of an audit, the proper avenue to address your disagreement is appealing your case to the IRS Office of Appeals. However, if you have missed the deadline to appeal (30 days from the issuance of the audit results – called a “thirty-day letter”), you can request audit reconsideration if the IRS has not considered all of your arguments and/or documentation. Audit reconsideration is common in mail audit cases because the IRS automatically sends letters that taxpayers either miss or do not know that it is the time to appeal. When the IRS sends a Statutory Notice of Deficiency (called a “SNOD” or “90-day letter”), the IRS no longer has your case. Your options are to petition the US Tax Court within 90-days or request audit reconsideration if the IRS has not considered your argument. One important note: taxpayers do not have a right to audit reconsideration. However, the IRS often grants audit reconsideration in those cases where the taxpayer’s argument and evidence has not been heard and considered.
Appeal is available
IRS audits result in an additional tax, penalties, and interest owed in 90% of the cases. If there is a change proposed by an IRS auditor, the IRS offers the taxpayer the ability to appeal their findings before the tax is assessed. These procedures require that you timely protest your dispute with the IRS and clearly present your facts, tax law, and position with the IRS appeals office.
If you disagree with any audit findings, the tax code provides for taxpayers to be able to appeal their determination prior to assessment. The most often appeals route is to the IRS Office of Appeals. The other avenue to appeal prior to assessment is to petition the determination to the US Tax Court. You must timely and properly request assess to either of these pre-assessment appeals venues. Appeals cases are often left to experienced tax professionals who can properly assess your risks, petition appropriately and timely, and represent you before the Appeals Officer.
Offer in compromise: Doubt as to Liability
The OIC-DATL solution is rarely used to contest an audit. However, if this option can work like the audit reconsideration. If the tax is already assessed and the taxpayer’s appeal option have been exhausted or not used, OIC-DATL is a solution option. The taxpayer files Form 656-L with all of the supporting documentation and argument to refute the audit adjustments. The IRS can make a decision on the evidence provided or “re-audit” the taxpayer.
Need help with an audit contact us today.