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The words “IRS audit” strike fear into the hearts of millions of Americans. Movies and TV tend to depict tax audits as a daunting and invasive process where the IRS swoops in and takes your home because you couldn’t pay your taxes.
This portrayal of audits tends to be dramatized. It’s also fairly uncommon as audit rates reached historic lows and only 0.05% of tax returns have been selected for audit in the past decade. However, this fear is not totally unfounded and taxpayers under audit tend to opt for tax audit representation to get through this difficult time.
Taxpayers have a right to retain representation under the Taxpayer Bill of Rights for all tax matters, not just audits, and to contest IRS decisions. Tax audit representation is the process of engaging a tax professional who specializes in the audit process and is highly familiar with IRS language and administrative procedures.
While an audit defense expert may help you in other tax matters in a consulting role, such as recordkeeping and internal controls to reduce the likelihood of a tax audit, audit representation entails giving the tax professional power of attorney to represent you in your IRS audit. Being under some degree of examination with the IRS may be the impetus for seeking tax audit representation, even if a field audit has not commenced.
The tax professional assumes communications with the IRS in your place and negotiates with them to halt the audit process, determine which documents are missing or need to be fixed, and in some cases, reverse the outcome of the IRS’ initial determinations and findings.
Audit representation fees vary significantly depending on the type of audit: a field audit, the type commonly seen in media where IRS agents come to your home or place of business, will cost significantly more for professional representation than a “desk audit” which is conducted by mail.
A good rule of thumb for estimating how much professional audit representation services cost is $2,500 per tax year that is being examined. For example, if both your 2017 and 2018 tax returns were selected for audit, this service is likely to cost $5,000.
There are a plethora of details to consider before, during, and after an IRS tax audit.
The first is recordkeeping. Good recordkeeping is the foundation of making tax time easier. This isn’t solely limited to receipts, W-2 forms, and other easily quantifiable forms and transactions. Many business and medical deductions require additional substantiation, such as proving the purpose of a purchase or how much time you spent in one place. While having strong records that are easy to obtain and reference doesn’t necessarily prevent audit selection, it will make responding to the IRS faster and easier.
If you are already under audit, think of situations that may have caused you to fall behind on tax matters or change your information. Marriage, divorce, starting a business, moving, and other major life changes may cause you to miss filing your tax return or enter incorrect information.
After the audit, consider preventative actions you can take to file your taxes on time and accurately in the future such as setting reminders, improving your recordkeeping, and making appointments with your tax professional as major financial events and life changes happen.
While the audit selection process is fairly random, the following are common “red flags” in the federal tax processing system that are likely to capture the IRS’ attention.
While it isn’t completely out of the ordinary to report income and expenses in figures that happen to end in 0 or 5, the IRS tends to find it suspicious if too many numbers on your tax return are reported like this. If most of the figures end in any other number, it is considered less likely to be forged.
What ultimately causes most tax problems is a history of missing and incomplete tax returns. Habitually filing them late without an extension may also trigger an audit.
Having tax returns on file for the years under examination or audit can prevent a great deal of hassle, and reduce the likelihood of audit selection.
Did you receive an enormous gift, win a prize or the lottery, or some other massive economic transaction?
Even if the prize you won was not in cash, such as a house or car, this generally creates taxable income even if you did not receive a 1099 or W-2G form for your winnings. If efforts were not made to collect on the balance but a tax form was issued after the fact, an audit is likely to be triggered.
Did you receive an enormous gift, win a prize or the lottery, or some other massive economic transaction?
Some categories of taxpayers are prone to higher audit rates than others. They primarily include small business owners, high-income individuals, taxpayers who pay alternative minimum tax, and taxpayers with excessive itemized deductions.
These items tend to be rife with fraud and massive errors, and audits are more drastic forms of combating the tax gap by addressing these areas specifically.
Tax authorities can run random tax audits for compliance purposes.
There are actually different types of IRS tax audits, the less severe forms are called examinations. No matter what type applies to you, the first thing you should do is not panic. Professional audit representation will give you the most peace of mind, but you should also do the following.
For field audits in particular, you should know the difference between IRS employees and scam artists.
The IRS will first contact you by mail. They will never call, text, or email you, or contact you on social media. The only time an IRS agent will call you is if they want to schedule a visit.
If they visit your home or business, ask to see their badge number (pocket commission) and Personal Identity Verification Credential to ensure they are actual envoys from the IRS. If the visit is unannounced and they demand payment, it should only be requested to be made out to the United States Treasury.
If you are doing an office audit, where you talk to a revenue officer or agent at your local IRS office, you should bring all of your relevant documents to your appointment. Tax returns, W-2 and 1099 forms, receipts, and any other records that substantiate claims made on your tax returns, or that verify your identity.
Mail audits, also called desk audits, are conducted by mail. They often entail responding to automated underreporter notices and filing an amended tax return to fix the errors made, or calling to clarify what the IRS is seeking. If you have missing documents, you should seek them out along with filing any unfiled tax returns to get your account in good standing.
A rarer audit, and the most intense form, is the Taxpayer Compliance Measurement Program (TCMP) audit. While this program was discontinued in the mid-1990s after the Clinton administration’s restructuring and reform of the IRS which introduced the Taxpayer Bill of Rights, it may come back at any time. TCMP audits were designed for statistical purposes and entailed substantiating every line item on your tax return. Not even field audits will examine a return this intensely.
If you are under audit, the IRS will expect you to contest their findings, substantiate your income and deductions, or pay the amount they are requesting as a result of their initial examination of your return. If they are examining or auditing a particular tax year or item, you only need to produce documents for them and not your entire tax return. You do not need to volunteer more information than is necessary.
Even if you do not have all of the documents required to contest your audit, or do not have the ability to pay the resulting tax bill, you should contact the IRS to let them know you are making a good faith effort to get your documents together. If you are experiencing hardship such as job loss, disability, or fleeing domestic violence, the IRS may give you more time to respond and find representation.
