IRS Audit Defense

Audit Representation

With audit cases the focus is not on your ability to pay but rather on supporting documents that will enable us to prove any deductions that the IRS or state is challenging. The critical part of audit cases is to show the auditor in a clear and concise manner how you came up with your expenses and to present them in a way that follows basic accounting principles.

Many clients are audited and do not have back-up documentation for expenses they claimed on the return in question. Part of audit representation involves reconstructing reasonable expenses to help minimize the assessment of additional tax.

Our representation during the auditing process involves not only proving your income or expenses, but a significant part also involves persuading the auditing officer to adopt a more reliable audit methodology that is more conducive to the taxpayer’s industry and business practices.

Types of IRS Audits

There are several types of audits conducted by the IRS. These may be in the form of mail correspondence or they can include a face-to-face meeting. If you receive a letter from the IRS informing you that you have been selected for an audit, the worst thing you can do is ignore it.

We have worked with clients who were so afraid to attend the audit they did not reply, and thereby ended up owing exorbitant amounts in additional taxes. The auditor’s request for information must be honored — they cannot simply dismiss the audit due to a taxpayer’s failure to respond. The auditor will disallow a whole series of tax deductions claimed because no proof was given when requested.

Tax Return Compliance Letters

The IRS may send a computer-generated letter stating that a certain item on your tax return has a possible error and that they have automatically adjusted it. It is very possible that these automated letters can be challenged if you know the tax regulation that privileges you to claim that deduction, credit, or exemption.

We have encountered cases where the IRS’s automated system sent letters to the client, and their tax preparer was unable to defend the claim they made on the return. Some tax preparers rely heavily on preparation software without knowing exactly how the tax is being calculated. You need a representative that understands these letters and can defend a claim if such a defense is warranted.

CP2000 Notice

The CP2000 is usually sent through the IRS’ automated system. It notifies the taxpayer that income reported on the return was less than the total amount of income reported to the IRS by third parties. Some taxpayers may not bring all of their tax documents to their preparer, which can result in a return being prepared missing critical income information.

By the time a notice of additional tax assessed is received, you will also owe an accuracy-related penalty and interest on the tax amount assessed. If you receive these types of letters, we can review them to claim any additional credits or deductions that would offset part of the underreported income.

Face-to-Face / Field Audits

A field audit is conducted by a local IRS representative, known as a Tax Examiner or Revenue Agent, who will schedule a meeting at your place of work, your home, or the local IRS office. It is also possible for the meeting to be conducted via telephone if all proof elements can be mailed to the auditor in a clear and concise manner.

Some taxpayers choose to take on the audit themselves, only to find that they may have opened themselves up to further probing from IRS personnel. It is best to know how to respond the first time during an audit in order to reduce the chances of extending the audit to other years.

Audit Statute of Limitations

The IRS has three years from the date a return was filed to assess any additional tax through an audit examination. If time is running out and they are in the middle of an audit, they often ask the taxpayer to sign a waiver extending the collection statute period.

You need to consider signing an extension form very carefully as its impact on your particular case can determine how much you will end up owing. If you don’t sign the form, the IRS would expedite their conclusions and give you very short deadlines to prove them otherwise.

Notice of Deficiency

The IRS sends a Notice of Deficiency after several reports and analysis have been conducted during the audit process. This statutory notice is not a demand for immediate payment nor is it a tax assessment — it is a proposed deficiency which usually gives you 90 days to file a petition to the Tax Court if you disagree with the changes made by the IRS.

If you missed this letter and do not know how an assessment was calculated against you, there is an opportunity to fight these types of assessments through what is known as an Audit Reconsideration. A tax resolution professional can order the audit report from the IRS for professional review and determine the best course of action.

State Tax Audits

Most often, a state will receive information from the IRS upon the conclusion of a federal audit resulting in an increase of income tax assessed. The states normally take the changes from the IRS and recalculate your state taxes. Part of the strategy is to first handle the IRS audit and confirm positive results before pursuing a state audit reconsideration using the same elements.

States have their own set of rules for sales audits and payroll audits. When the books and records of a business are inadequate, auditors can rely on alternative auditing methods to produce estimated sales volumes — which can result in astronomical assessments. We work with businesses and individuals to challenge these indirect audit methods and find the best possible resolution.