You haven’t bitten your nails in years, so why are you nibbling at them now? Perhaps it’s thinking about the letter from the Internal Revenue Service. You’ve been notified to prepare for an audit.
Maybe you know the chances of this happening are slim. You also know you haven’t under-reported your income and you’re very sure that there were no math errors.
You’ve used the same CPA for years and she’s always been spot on. But, here it is – you’ve been summoned by the government’s tax agents to explain a few things on your return.
It passes through your thoughts that you might need an attorney. IRS audits are nail-biting affairs (so you believe) and your entire financial world will be looked at under a microscope. But good attorneys cost money and right now, your fledgling business of three years is just now showing a profit. Should you risk it and go it alone?
This sort of scenario passes through the minds of many people when they receive a notice to audit from the IRS. It’s true too 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. Although audits are different for everyone, if you choose to represent yourself, I have compiled a few helpful tips to assist you.
IRS Audit Tip #1: See The Playing Field
The IRS has limited resources so most taxpayers 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. If you understand what the government is looking for, you can start mentally preparing to organize your documents in the most efficient way.
This will provide the most complete validation 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 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.