IRS audits are often unavoidable. Certain circumstances flag a return for an audit, even if the taxpayer has worked furiously to file an accurate return. If you receive an audit notice, it is important to remember that audits in themselves are not bad.
The IRS conducts them when it has questions about a return, which the taxpayer may answer satisfactorily. To survive an audit without undue stress or an unexpected tax bill, understand the audit process and hire a tax professional who can establish your case, negotiate on your behalf, and, when necessary, fight for you through the appeals process.
How Taxpayers Are Selected and Informed of Audits
Many taxpayers wonder if they are in danger of being selected for an audit. No exact answer is available because the IRS keeps its red flag formula confidential. However, some returns are selected at random while others are flagged by a computer because they contain characteristics the IRS correlates with errors, omissions, and misrepresentations.
Some factors increase the chances of an audit, such as these examples:
● Audit history
● Large business expenses
● Large self-employment deductions
● Sizable income increases
● Sizable income decreases
● Unusual income, such as lottery winnings, gambling proceeds, and legal settlements
● Apparent discrepancies between income and lifestyle
Whether issued at random or because of a red flag, audit notices do not explain the reason. Instead, they inform the taxpayer whether the audit is by mail or in-person, request relevant documents, and list deadlines.
Audits Seek to Verify Income, Deductions, or Both
The IRS audits returns to verify income, deductions, or both. A key question is whether the income and deductions claimed jibe with the documents the IRS has on file. For example, if a return declares wages for income and deducts property taxes, the IRS can check both against paperwork furnished by the taxpayer’s employer and mortgage company. If the auditor finds an apparent discrepancy, they will request additional supporting documents from the taxpayer.
In other cases, the IRS may have no documents to verify income or deductions. For instance, a self-employed person’s return may include income where no 1099 or records of business expenses are furnished to the IRS. The agency, in such a case, would request that the subject of the inquiry provide documentation showing that the return is accurate.
Responding to an audit is essential to protect your rights and ensure you are assessed the correct amount. If you ignore the audit, the IRS is likely to proceed with its tax assessment without your documentation of explanation of why your return is correct. Lacking this information, the agency can assess taxes based on the calculation that results in the highest possible bill for back taxes, fees, and penalties.
Possible Outcomes
Audits conclude in three ways: 1)The IRS determines the return is correct 2)The IRS refigures the taxes and the taxpayer agrees 3)The IRS refigures the taxes and the taxpayer disputes the findings
Scenario #1
When this occurs, the audit concludes and the taxpayer owes nothing.
Scenario #2
Often, an audit demonstrates that the taxpayer made an error. When this occurs, it is possible to negotiate with the IRS on the final amount of tax, penalties, and interest in exchange for signing a settlement agreement. In addition, taxpayers or their representatives may prevail in defending some points of contention and concede others, resulting in a negotiated settlement.
Scenario #3
In other cases, the taxpayer disagrees with the auditor and no agreement is reached. When this occurs, the taxpayer has the right to appeal.
The first step is to appeal to the manager of the office that conducted the audit. If that fails, taxpayers can file a protest with the IRS Independent Office of Appeals. When unsuccessful there, a petition to the tax court is the next option. Finally, if the tax court hands down an adverse decision, taxpayers can take their cases to the appellate courts.
The Importance of Representation
When you have a complex tax situation or an IRS dispute, representation makes the difference between countless headaches, frustrations, and increased tax bills and a smooth process where you pay the minimum amount possible. To achieve the best results, consult a tax professional as soon as you receive notification of an audit. Your representative will help you gather the needed documents and present your case to the auditor.
Chances are high that your representative can resolve the issue with the auditor. However, in cases where there are factual disagreements or disputed legal interpretations, you will need legal representation throughout the appeals process. Many taxpayers win at the Office of Appeals and tax court levels, so if you are treated unfairly by the IRS, it pays to never give up the fight.
Tax Resolution Law Firm Detroit has been helping clients with tax disputes and issues for more than 20 years. If you are facing a tax audit you have the right to legal representation and our Tax Resolution Attorneys are experienced in all matters involving tax resolution, tax dispute, and general concerns relating to IRS tax and debt relief.
Don’t go through an audit or tax dispute alone. Contact our Tax Law Office for assistance with your audit. We can help you prepare and represent you through the process with peace of mind.
