What to do if you are audited by the IRS

The IRS is increasing the rate of examination of returns at an alarming rate.  Why?  They have figured out that for every dollar the IRS gets in funding, they return nine to the treasury.  The treasury needs money!  There are many kinds of audits, and each requires a specific type of response.

Whenever you receive a notice or letter from the IRS, you should get us a copy immediately.  We will help you determine the accuracy of the notice and fight for your return to remain as filed.  Inefficient or inappropriate handling of audits results in increased taxes – do not try to handle this alone!  We are prepared to assist you with representation for all types of audits.  We even have a former IRS auditor on our team!

Several types of audits include:

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Notice of Proposed Assessment (CP2000 letter)

  • This looks like a bill, but it is not
  • Generated from the IRS “matching program”
  • The IRS computer compares information it received about you from an outside source to your tax return
  • If the computer cannot reconcile your return to the outside information, they send you a notice asking you to pay the amount now due or tell them why they are wrong
  • THEY ARE OFTEN WRONG
  • When they are not wrong, additional information may significantly reduce the amount they propose is due or even generate a refund for you!
  • A very high percentage of people simply sign the form and send the check to the IRS without realizing they may not have to pay at all in some circumstances. This can mean the taxpayer becomes ineligible for certain credits (such as the large refundable Earned Income Credit) for up to 10 years!

Correspondence Audit

  • Generally the kind of audit on individual taxpayers
  • Starts with a letter from IRS telling you they are examining your return
  • The letter requests that you mail in or fax documentation to prove your deductions
  • FREQUENTLY taxpayers do not respond to this notice and end up losing their rights to object to a tax increase and end up paying the tax even when they have done nothing wrong!
  • When the taxpayer does respond, the caliber of auditor is on the low end of the spectrum and they often do not understand the documents provided and/or the applicable law allowing these documents as support for the deductions claimed. Again, taxpayer ends up paying too much tax!

Office Audit

  • One of two types of audits generally used for business taxpayers
  • Starts with a letter from the IRS telling you they are examining your return
    • May have a specific auditor and date of appointment already assigned (we can change the date if needed)
    • Assigns a local office, which may or may not be the best office for you (we can apply to get this changed if needed)
  • Auditor and taxpayer (or better – the taxpayer’s representative) meet to review the items under examination
  • We DO NOT recommend that a taxpayer self-represent in this case (would you self-represent in court?)
  • Proper presentation of the items increases chances the IRS will accept them
  • Auditors interpretation and understanding of the documents vary – strong supporting knowledge regarding your business, the particular expenses, and why the deduction should be allowed for your business are required to prevail in audit
  • Often, taxpayers self-represent and do not have the knowledge to best present their case so the IRS gets more money AGAIN!

Field Audit

  • The second type of audit generally used for business taxpayers
  • Starts the same as an office audit
  • Generally, much broader in scope than an office audit and uses the IRS’s highest ranking auditors
  • Auditor comes to your place of business (or your representative’s office) and reviews the requested documents
  • Again, auditor’s interpretation and understanding of the documents vary – strong supporting knowledge regarding your business, the particular expenses, and why the deduction should be allowed for your business are required to prevail in audit
  • Again, self-representation usually results in paying more taxes to the IRS than would have been paid with representation

What to do when you get a notice from IRS:

  1. DO NOT PANIC – unless you have intentionally defrauded the government, the worst that can happen is that they will want you to pay more money – not ideal, but not that scary either
  2. Call All About Numbers to advise us you received correspondence from the IRS
  3. Fax, mail, email (using a scanner), or drop off a COPY of the notice
    1. If we did not prepare the return, please bring us a COPY of the return as well
    2. DO THIS ASAP! There are time limits that need to be followed
  4. The correspondence will be reviewed by a preparer (yours if we prepared the return)
  5. You will be contacted regarding the findings of the notice within 5 business days
    1. This does not mean the issue is resolved in 5 days
    2. This first contact MAY be just to let you know we are still reviewing your file (some cases require additional research for which time needs to be properly allocated)
    3. We will outline with you a plan of response and inform you of the fees (if any) required to handle your case
    4. We will ask you for additional supporting documentation if necessary
    5. We will ask you to sign documents allowing us to represent you
      1. Power of Attorney
      2. Engagement Letter
      3. Fee Agreement (work will not begin without a retainer)

How to organize records for presentation to the IRS

  • Documents should be sorted by category first
    • These categories are determined by those listed on the IRS forms
    • Sub categories can be used to help organize large files
    • Documents include both the itemized expense (bill) and proof of payment (credit card receipt, cancelled check, line item on a statement that corresponds to the receipt)
      • Notation on the bill for how this relates to your business is helpful
      • Meal documents require the names of the persons present and reason for the meal in addition to the usual date, amount, vendor, and method of payment/proof of payment
  • Within each category
    • Organize by month
    • Then by vendor
    • Use the same order for each month
  • Total the category items using a calculator tape and or Excel (we prefer use of both)
  • Attach the total to the front of the documents
    • IF THE TOTAL DOES NOT MATCH what you claimed it should
      • Look for more receipts
      • Verify how you arrived at your figure originally
    • Make sure the totals list is in the same order as the documents beneath
  • MAKE COPIES OF EVERYTHING