Oh darn! You've just received an audit notice from the IRS
October 19, 2015
So you open up your mail and you see three words that drive fear into even the most honest people – Internal Revenue Service. The letter reads something like – your return has been selected for examination – as if you’ve won a prize. They let you know that you have rights, which are indeed important. After you pick yourself off the floor – here’s what happens next.
The letter asks for you to make contact with the examiner to schedule an appointment. The single most important thing to do is to respond. Acknowledge the receipt of the notice, but don’t set up the initial interview. Either let your preparer respond and set up that initial appointment or find a tax professional who has experience in navigating audits. Going into an IRS audit without can be a devastating and intimidating experience. Don’t do it. Let someone else do it for you.
The tax professional will get a power of attorney signed by you (form 2848), which allows him to contact the IRS examiner on your behalf and conduct the audit. The tax professional will also likely have you sign an engagement letter which is your contract that spells out fees, terms and conditions of your relationship.
You can choose not to show up for your audit. In fact, most tax professionals will recommend you stay home. First, the experience can be really stressful. Second, it gives your tax professional an opportunity to consult and thorough research any open items. Third, it’s your right not to be there. Take it.
Before the initial interview, your tax professional will request all of the documents you used to prepare the tax return. The initial audit notice should indicate the specific areas of concern for the examiner. Those specific areas are not to be intended to be all-inclusive. The examiner, at his/her discretion can expand the scope of the audit, based on the initial findings, to look at more sections of the return as well as to expand the number of years. The IRS has a three year statute of limitations on most items. Many audits will also request to review all of your bank statements to see if you have any unreported income. That said – each examiner has a style and preference and has a fair amount of discretion to review the return. It then becomes your tax professional’s job to attempt to limit scope to problem areas.
Many audits can be resolved in the same day. Others can go on for months. It really is a function of how complicated the return is and the style of the auditor.
The key myth I have heard over and over again is why would the IRS care about me – there isn’t much there. From their perspective, it really doesn’t cost them much to audit. You may not think there isn’t much there. But even a small oversight creates a tax assessment that is indeed worthwhile to the IRS.
The audit will conclude with a summary of findings where there is either the coveted “no change” report. This means that the return will stay as is. More often there are some “adjustments” which means a tax bill is due. Now there is an opportunity to contest the findings. You can push back to the examiner. Examiners are given some latitude to negotiate an agreed upon audit finding for expediency. If you still don’t like the end result, you can speak to the examiner’s manager. If satisfaction still is not achieved, you can appeal the decision. And finally you can take the matter to tax court – a judicial process that exists under the Treasury / Internal Revenue department. An alternative approach is to pay the contested amount and then sue the Federal Government for a refund. Once the balance due is established, you then move to the collections side of the house.
Obviously a no change notice is a good reason to take your tax professional out for cocktails. If you owe a balance due – write the check. If you can’t afford it, you can enter into a payment plan. If you can’t pay the balance off within 6 years, you can then apply for an offer in compromise. You’ve seen the advertisements on television where you can settle for pennies on the dollar. Now, a bit of reality here – the IRS is the most powerful and efficient collection organization out there, save for the mafia. They are not in the habit of forgiving debt just because you don’t want to pay it. But if you genuinely and objectively don’t have the money and you have no ability to get the money, then the offer in compromise process may be a very good way to manage an otherwise devastating financial matter. As an aside, bankruptcy does not discharge many tax debts – so you’ll have to deal with this one way or another.
Once the balance has been resolved, the matter is considered closed. Yes, the IRS will flag the return for future years to keep a closer eye on your return. But presumably if you were caught once for doing something, you likely won’t do it again anyway.