A line item or two on your tax return triggered an IRS audit? It could have been something as innocent as a change of income – it being much higher or lower than previous years – or taking a deduction that is often misused.
Maybe it was an error in your math, which is common enough. Or perhaps you thought that small account you kept in Bermuda wasn’t worth reporting because…?
If you are going to be audited by the IRS, you might think it is simply a process of pulling some bank statements and invoices and it is a done deal. It does not quite work that way. While you can be applauded for trying to take matters into your own hands, do not get overly confident.
Even the simplest IRS audits can get complicated very quickly, and if you are not 100 percent certain of what you are doing, you could wind up in a more precarious situation than you already are.
In plain words, your business is going to get hit with a debt to the IRS and it will include penalties and interest. Perhaps on the larger scale.
At my firm, Brotman Law, many of our small business clients come to us because they have tried to defend an IRS audit on their own and fell flat. A lot of people balk at the idea of paying for a tax professional, be it a tax attorney or CPA, but in the long run, it is a worthwhile investment.
Odds are you could end up paying more to the IRS than you would to an attorney or accountant. We understand the tax nuances of small businesses and have helped many entrepreneurs out of difficult IRS situations.
I am going to discuss what can go wrong if you try to defend an audit on your own versus the benefits of working with a seasoned tax professional. We will also talk about the services Brotman Law offers in the area of audit defense and what you can expect to pay.
David vs. Goliath All Over Again
Should you represent yourself in an IRS audit? It depends, but not usually. First of all, the mistake that a lot of taxpayers make is they think that they can handle the audit because A) they are smarter than the auditor, or B) the errors on the return are not that serious.
The problem with that rationale is the taxpayer who goes into a situation with an auditor — unless that taxpayer is a tax attorney or a CPA — is not going to have the same level of experience and knowledge about how audits work.
Even if the taxpayer is familiar with the law, they are generally not familiar with the way audits work. The risk is that even if the tax loss is minimal, the taxpayer could potentially put themselves into a damaging situation.
For example, if you are not really used to changing tires and you get a flat tire on the road, yes, you could change the tire yourself. There is the possibility that you will do a reasonably good job in changing the tire and then everything will be okay but there is also the propensity that you might make a mistake.
If you don’t place the jack in the right place on a flat, hard surface and block the opposite tire, the jack could slip from under the car and injure you badly.
If you believe that there is a mistake on your return and if that mistake is significant, meaning you owe $5,000 or more in back taxes to the government, then you may want to consider hiring a representative to help you.
Once you get into a situation where there is an audit and adjustments are being made, then the penalty conversation comes into play.
The more adjustments that are made on the return, the more it increases the likelihood that the auditor is going to penalize the taxpayer.
Due to the circumstances, in a lot of the audits, we are not able to make much of an adjustment in terms of the tax due, but where our firm makes a substantial difference is on the penalty portion.
Even in situations where we have taxpayers who under-report millions of dollars in income, oftentimes, we have been able to explain it away and/or negate criminal penalties.
That is a fairly extreme example but generally speaking, in an audit you are at a strategic advantage by hiring a representative who knows what they are doing because we know what to look for.
We can help you through the audit process. We can help you minimize the pain that you are going to go through because we know what the auditor will and will not accept.