IRS Audit Defense
IRS tax audits are complex and stressful. The IRS often attempts to deny deductions or credits based on imperfect documentation and substantiation. If you receive notice of an IRS audit examination, you should strongly consider hiring a tax attorney to protect your rights. An IRS tax attorney will ensure that the IRS follows its audit examination procedures, provides the taxpayer with an honest assessment of the taxpayer's situation and follows internal IRS policies that ensure fairness and a thorough review of all facts and eligible support to substantiate a taxpayer's tax return positions. Taxpayers must understand that the IRS agent contacting them for the audit has performed a detailed pre-contact analysis and believes that the IRS position is not frivolous.
How Far Back Can the IRS Audit You?
The period the IRS may audit depends on a number of factors, but the starting point for how far back the IRS can audit is whether the taxpayer has unfiled tax returns. An IRS audit may examine open tax years for unfiled tax returns and back taxes. If a taxpayer has filed returns, an IRS audit may go back three years from the date the tax return was filed. If there is a substantial underpayment, an IRS audit may look back up to six years for a filed return.
How Do Taxpayers Benefit from Hiring a Tax Attorney?
Taxpayers are best served by hiring a qualified tax attorney to ensure that deductions are preserved and that the tax laws are applied fairly. The IRS revenue agents are required to follow internal IRS rules and procedures to administer a tax audit. A tax attorney can best interpret these complex rules to ensure that the IRS follows the rules and procedures it is bound by when auditing a taxpayer's income, deductions, and credits.
Tax attorneys also ensure that the taxpayer does not lose appeal rights and access to the U.S. Tax Court, if necessary, to preserve a right to appeal. Utilizing a tax attorney's understanding of the process will reduce stress during the audit examination and responding to IRS information requests.
Tax attorneys are also effective at limiting the extent and scope of the audit. An experienced tax attorney knows what limitations the IRS revenue agents have when examining tax returns and when they must accept a reasonable position.
How Does the IRS Select Taxpayers for an IRS Audit?
The IRS has different audit programs to enforce the voluntary compliance system. The type of audit can determine if the audit will be contentious or routine.
The first type of audit is a random audit, where a taxpayer's return is selected and a full audit of each reported amount, including income, deductions, credits, carry-forwards, carry-backs and payments. The IRS must review a minimum number of returns each year based on random selection to ensure accuracy of compliance and understand what types of return errors arise. This type of audit examination may not produce any changes, but a thorough exam should be expected. Taxpayers may run into difficulty when their returns are complex or require a lot of supporting documentation.
Another common audit relates to returns that report income, deductions or credits that arise from a newly enacted tax law or change in interpretation. The IRS may audit specific items to understand taxpayer reporting tendencies and ensure compliance with the new laws. An example includes the First Time Home Buyer's Credit enacted in 2008 that required strict compliance and supporting documentation. This type of tax law update requires review to help Congress understand if the purpose of the tax law was being fulfilled.
The most common IRS audit examination relates to items that the IRS believes are subject to abuse or misreporting. Highly audited tax returns may include items like the home office deduction, the earned income tax credit, claims of exemptions for dependents, business mileage and other business deductions that are likely to be non-deductible personal expenditures. In these cases, the IRS is looking to correct under reporting and increase tax revenues for the Treasury.
The IRS develops statistical analysis to determine if the tax return is out of line with general reporting ratios for specific industry or business types, and then selects returns with a higher probability of under reporting of income or over reporting expenses. Another concern of taxpayers is being audited by the IRS and no receipts are stored or retained to prove the reported income or deductions.
What Steps Can You Take to Defend an IRS Tax Audit?
When you receive an IRS notice of audit examination, you should seek out a tax attorney for a free consultation to understand your rights and options. You should always respect IRS notice response deadlines. Too often taxpayers ignore notices of audit examination or assessments, and either lose or risk losing rights to contest the examination rights or rights to appeal IRS tax determinations. In addition, the IRS may take steps to file liens or levies that can be more difficult to remove or prevent once they have been initiated by the IRS. Taxpayers should work within the framework of an IRS audit examination to achieve the best result possible.
Taxpayers also may be concerned with possible criminal charges for tax crimes for failure to file or pay taxes. In these cases, reaching out to a tax attorney can help you assess whether a taxpayer should expect criminal charges or is the target of a criminal examination. The IRS has specific protocol to follow if a civil (i.e., monetary tax penalties) case is converted or expected to be converted to a criminal tax case.
The IRS also has a hierarchy of evidence that taxpayers should be prepared to utilize to defend an audit examination. The IRS prefers documentation as evidence compared to oral evidence or explanations offered by the taxpayer. The IRS cannot disregard oral testimony by a taxpayer that corroborates or substantiates the taxpayer's audit position. The IRS will attempt to verify any facts proposed by the taxpayer and the taxpayer should be prepared to present this evidence. Taxpayers must present the best evidence to successfully defend an IRS tax audit.
Taxpayers may be contacted via a phone interview to set up a formal meeting with an IRS agent to perform the audit examination and discuss the IRS exam findings. Taxpayers should be prepared to ask questions to understand how the IRS agent reached its conclusions and what evidence may be disclosed to support the claim. These interviews should not be used as a time for the taxpayer to volunteer information because the IRS can use that information for its exam conclusions and potentially as a basis to expand the scope of the audit examination.
Taxpayers contacted for an interview and audit must understand that the IRS agent has performed a pre-contact analysis if the audit is not a random audit. In these cases, the IRS agent believes based on statistical analysis that an audit is warranted because there is a risk of large under-reported income, a change in return that may be suspicious, the possibility of missing items, or unusual deductions for example. The IRS agent has assessed the materiality and possibility of collection of assessed taxes, so a taxpayer referred for audit based on specific adjustments must be prepared to prove the return position is correct.
Other Audit Examination Actions
The IRS may also examine taxpayer returns that are filed late or include late filed information returns that trigger substantial penalties. For example, if a taxpayer owns an interest in a foreign corporation, a Form 5471 filing may be required. A substantial $10,000 penalty is generally triggered if the return is filed late or not at all. If the IRS discovers a taxpayer has foreign business or employment activities, additional examination work related to FBAR and foreign financial accounts may be performed to understand if additional information returns filings are delinquent. This could result in additional substantial penalties. Taxpayers may take part in voluntary disclosure programs to attempt to correct these issues and minimize penalties, but require acting before the IRS uncovers the missing returns.
State Tax Audit Defense
Michigan and municipalities also audit taxpayers, sending out a tax assessment based on tax return reviews. In many cases, the return may be audited as part of a desk audit when there is a change from one year to the next. In other cases, a tax audit may result from amounts that appear well above or below the normal levels. Having a good audit defense lawyer help you may streamline the process and defend against overzealous governmental tax auditors. Certain cities have been known to aggressively send out assessment notices with changes to tax returns relying on the short time to respond before an assessment becomes final. If you receive a tax assessment notice and are unsure why you received the notice, contact a tax audit defense attorney at Steiger Tax Law to review the claim and advise you on how to respond. Doing nothing is never a good idea because assessments that become final are automatically sent to collections.
Contact Steiger Tax Law for IRS Tax Audit Help
If the IRS has notified you of an IRS tax audit of your personal or business tax returns, contact Michigan tax attorney Andrew Steiger at Steiger Tax Law to protect your rights and defend you against the IRS. Failure to respond to a request to an IRS audit exam notice can jeopardize your rights and deny you valuable appeal rights. Call today for a free consultation at (248) 259-6367.