First, it should be noted that the decision to represent yourself in an audit should be made carefully. Examination changes during the audit process can ultimately be extremely costly with the extra interest and penalties that the auditor may add to your final tax bill. Even though audits are different for everyone, I have compiled a few helpful tips to assist those who ultimately decide to represent themselves.
IRS AUDIT TIP #1: SEE THE PLAYING FIELD
The IRS has limited resources and taxpayers mostly do not get audited by the government without a reason. This does not mean you have done anything wrong, but you may have unusual circumstances like working in a cash intensive business or have an unusual deduction that the government wants to take a second look at. The most valuable indication of what the government is after is the auditor’s Information Document Request (IDR), which is provided when you are initially contacted by the IRS. By understanding what the government is looking for, you can start mentally preparing and organize your documents in the most efficient way to provide the most complete substantiation possible. The more complete your substantiation is for an item requested, the less likely the government is to challenge the information stated on your return for a particular category.
IRS AUDIT TIP #2: LIMIT THE SCOPE OF THE AUDIT
The IRS typically has three years to request examination of a return, except in the cases of late/no filings, significant errors or omissions in the reporting of income or expenses, and fraud. Because of the significant caseload of the auditor, the IRS will normally start auditing within one year and then open up other years if there are examination changes. As counsel, my number one priority is to limit the scope to only one year and that should likewise be your goal as well. Opening other years will often equate to more changes and ultimately increases the size of your final bill.
IRS AUDIT TIP #3: CONTROL THE FLOW OF INFORMATION
Taxpayers representing themselves have the distinct disadvantage of having to answer the auditor’s questions point blank when asked. You should never lie or make a material misstatement to an auditor, as this is a federal crime that carries possible jail time. During the audit, however, taxpayers should make every effort to control the flow of information. Carefully listen to the questions that the auditor is asking and answer only the question being asked. Do not provide more documents than what is being requested by the auditor. More information gives the auditor more ammunition to make assessments and, therefore, brevity is the key to successfully navigating an audit.
IRS AUDIT TIP #4: WIN MORE FLIES WITH HONEY THAN WITH VINEGAR
It is difficult for many taxpayers to keep their emotions in check during an audit. Many are scared of the government examining their records, angry at the inconvenience of the audit, and some auditors can be very difficult to deal with. However, the best audit results are gained by working with the auditor collaboratively rather than butting heads with them. Auditors are people too and they will often cut breaks to those taxpayers that they like personally or who make their job easier by coming to the audit organized and prepared. With this in mind, be nice to your auditor and do everything you can to facilitate the audit process.
IRS AUDIT TIP #5: PICK YOUR BATTLES
I handle audits from a big picture perspective. It does not make sense to fight tooth and nail for a small deduction when it may lead the auditor to open up other years or risk jeopardizing your working relationship with the auditor. Also, conceding deductions in some areas or by only taking a certain percentage when you do not have sufficient receipts or substantiation may ultimately serve you well. Auditors tend to respond positively when taxpayers are reasonable and small concessions may lead the auditor to be more lenient in other areas. Try to keep yourself focused on the final goal, which is getting the smallest examination change possible.
IRS AUDIT TIP #6: WHEN TO GET HELP
There is nothing wrong with the decision to represent yourself in an IRS audit, especially when you are organized and have nothing to hide. However, if your return is not entirely accurate, you failed to report income or overstated expenses, you did not keep very good receipts and records, or you feel you have reached an impasse with the auditor then it is a good idea to seek help. Since the ultimate goal is to have the smallest final bill or to obtain a “no-change,” hiring an attorney to represent you for a few thousand dollars has significant advantages.
Attorneys often have a prior good working relationship with the IRS, have expert knowledge of IRS audit procedures, know the right time to elevate an issue to appeals, and can often move through the audit quicker than a taxpayer can alone. In addition, the attorney client privilege offers a greater level of protection than an accountant or enrolled agent and is especially important in cases where wrongdoing has or may have been committed. Because of the attorney client privilege, anything you say to an attorney will be held in confidence unlike any other representation. When in doubt, most attorneys offer free consultations and it is best to seek advice from a few sources before moving forward. Doing so can often save time, worry, and money when the audit is all said and done.
What is the best strategy to take when being audited?
The first thing that we say to our clients is that you have the advantage in an audit. The advantage that you have in an audit is number one, you are the taxpayer, and number two, you have access to all the documents.
The government is put in a position where they are asking you for records. You have the opportunity to control both the scope of the information that is being provided. You get to edit out within that scope; what actually gets provided. You have a lot of choice there.
What I tell our team is you cannot control bad cards. For example, if a tax return has under-reported $100,000 in income, you are probably not going to be able to hide that. The advantage that you get in an audit is you can control the order in which the cards are being dealt.
The very first thing that we do in an audit is to know why the taxpayer has been audited. We look at the return and then we go through a pre-audit. We put the tax return through more scrutiny than what the IRS is going to put it through.
We are looking for issues that could come up and determine whether they are a big deal, a little deal or not a deal at all. We are actively looking at those issues and we are prescreening things.
Once we pre-screen things, we develop an audit strategy. This has nothing to do with the IRS. This has to do with how we are going to present the audit to the auditor when the time comes. For example, in the case of somebody under-reporting $100,000 in income, the first question is, is the auditor going to find it? If the auditor is going to find it, then there is no reason to try to hide the ball.
It is to the advantage of the client in that situation, to just come out and admit that there has been $100,000 under-reported. The reason for that is by coming out in the beginning and saying that, is you are going to avoid all the penalties and all the presumptions that the auditor has about fraudulent action. You are going to get yourself out of much more than you would by trying to hide the ball on one-hundred grand.
If there are things that you can hide the ball from the auditor on, then you are going to present things strategically. For example, if you are missing receipts, then you will provide a general sample. If one tax year looks better than the other, you will present the ‘18 data versus the ‘17 data or vice versa.
Audits are a fluid strategy, but by pre-auditing a tax return, if I organize the material appropriately and then control the presentation, you are going to have a much higher success rate in an audit than if you just show up with a whole bunch of documents and just hand them over to the auditor.
The most important thing that you can do in an audit from a strategic perspective, is to control the flow of information, control the pace of the audit, and to move the auditor through the playing field as you think they should move. Do not have them dictate how the audit goes.