July, 2003 Tax Tip
You Don't Have to Lose Sleep Over a Tax Audit
Many of my clients worry about getting their returns prepared and paying their taxes and, for most, once that's done, it's done - at least until it is time to pay their quarterly estimated taxes. However, as with clients of any tax practitioner, some of my clients have ongoing thoughts (and fears) about audits. Most Americans (and most assuredly my clients) do not cheat on their returns. Unfortunately errors are sometimes made as, after all, we are human. But the economic reality is that the tax dollars lost every year due to tax evasion is a compelling enough reason to hold the taxpayers accountable for their returns.
I tell my clients to accept the possibility of an audit as a fact of life. So, that said, what are we really dealing with?
To begin with, we need to understand exactly what the IRS means by an audit. Any time the IRS contacts you in any way, they consider that (and rightfully so) an audit. What appears to be a harmless little notice the IRS sends out is counted as an audit. So we know there are different types of audits, which I'll explain in a little more detail.
An "office audit" consists of a letter from your local IRS office to come in to a local office for a review and verification of certain items on your return that are set forth in the letter. Usually, but not always, this is reserved for smaller, less complicated returns. The atmosphere and the conduct of the audit are, for the most part, not intimidating.
A "field audit." is where the IRS comes to you, either at your home or place of business. This type of audit goes into more depth and generally deals with a complicated return. If you've been less than forthright on your return, now would be the time to worry. If you have filed an honest return there's nothing to worry about.
As most people have nothing to fear from an audit, I offer the following suggestions that can help you lead a worry-free tax life.
If you receive a letter from the IRS that informs you that they are changing your return, read it and see if you agree or disagree. Quite often the IRS computers generate notices in error. If you feel the IRS is in error, you, or your representative, should notify them right away in writing. Unfortunately, some taxpayers choose to give in rather than contest what seems to be an error. If you have any questions at all, I would be happy to assist you. If you feel the matter is clear to you, then contact the IRS yourself. While the best way is in writing, for validation purposes, several of my clients (or myself representing them) have cleared up misunderstandings right away on the IRS toll-free line.
Sometimes, a return is simple enough to be audited in the local IRS office. When this is the case, you have the right to go to the audit by yourself or with a representative. You can also opt to have your representative meet with the IRS alone, which, in my opinion, is almost always the only prudent alternative. Sometimes, when taxpayers face an IRS agent, they get so nervous that they'll talk too much in an effort to convey how honest they are. This is human nature, but it can be very damaging to your case. At times, you may actually have forgotten to provide income information to your preparer. If the agent asks about the income, allowing your preparer to honestly say, "I don't know anything about that payment my client received, but I will check it out," gives you both adequate time to put the best possible light on the error. This could be important when it comes to asking the IRS to waive a penalty.
Whichever route you chose, be certain to bring everything the agent wants, but no more. You might just open up a can of worms you didn't know you had. Some people believe that if they bring a mountain of paperwork, the agent will give up before even starting. In the past, that may have been true, but now the agent will simply go about his business.
Probably the most disruptive audit is the field audit. Here the IRS is usually looking for a good deal of information and sends you a list of requested information prior to your appointment. When this happens, you can either pull all the requested information from your files and give it to the agent to review, or you can pull the requested information and send it to your tax professional if, in fact, you plan on having him represent you.
Each alternative has its advantages and disadvantages. The chief advantage in having the IRS come to your home or place of business is you don't have to drive to your preparer's office with all your records. The chief disadvantage, particularly if you are a business, is the audit could cause a great deal of disruption to the daily routine, as your employees may be preoccupied by the auditor's presence.
Asking the auditor to meet your tax professional at his office minimizes the business disruption an audit may cause, but you will need to bring all your records to your representative's office. A further advantage to meeting at the representative's office is he may have information in his files or research sources that will help him argue a particular point in your favor.
I almost always suggest to my clients that the meeting be held at my office. Having the audit performed here allows me to control a great deal of the interaction with the agent on my terms, rather than his. More importantly, it also minimizes any contact my clients or their personnel may have with the IRS and, as a result, the potential for misspoken words, which can be very harmful, is reduced.
Whichever route is taken, the same rules for providing information to the IRS apply in a field audit as well as in an office audit - always tell the truth and volunteer to the agent only what he asks for.
Many people think the worst thing in the world that can happen to them is an IRS audit. However, if you have the proper documentation and no reason to worry, most of the time an IRS audit is nothing more than a minor inconvenience. As a CPA who has successfully represented many clients in tax audits, I have a great deal of experience dealing with the IRS. So If you receive a notice or letter informing you of an audit, don't worry unnecessarily. If you give me a call I would be happy to handle the details so you can live your life and sleep better at night.
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