Few things strike fear in people’s hearts more than getting an IRS Examination Letter. IRS tax auditors are trained to extract more information from a taxpayer than he or she has a legal obligation to provide. These auditors are aware that most people fear them and don’t know their rights, something that they can use to their advantage.
So should you open your door to that inspector?
Here is a look at a taxpayer’s rights and obligations in an IRS tax audit, and how to survive it.
1. Seek Professional Tax Audit Representation
During a Tax audit, a taxpayer can either represent themselves or have someone else represent them. It makes sense to seek professional audit representation as without it, one can end up paying more taxes than is necessary. The IRS does not leave any stone unturned when it comes to determining the accuracy of someone’s tax returns. Failure by someone to comply with the auditor’s wishes can result in the IRS recalculating his or her tax and slapping a hefty tax bill.
Some people may decide to do the tax audit representation themselves. While they may save some money by avoiding representation fees, they may get a substantial bill for a major tax deficiency. If one chooses to be represented, the representative must be an individual allowed to practice before the IRS, like an enrolled agent. It is advisable to use an IRS audit attorney, although this is a more costly option.
2. Get all Documents Ready
During an IRS audit, the taxpayer’s goal is to convince the auditor that the deductions, income and credits in question are correct. This will necessitate one to produce financial documentations to support claims that his or her tax return is correct. Although it is possible to appeal the IRS audit results, it is better to prove the claims during the actual audit to avoid the rigors and costs of an appeal. Some of these documents include:
- Receipts of expenses and purchases
- Employee documentation
- Previous tax returns
- Company or personal bank statements
The best way of getting these documents ready for the audit is keeping them well organized in advance. It is important to have good accounting records and it helps to have a good professional adviser. (See more information about accounting here.) The tax attorney who prepared one’s tax return should be in possession of copies of the documentation used to prepare the tax return. If a person’s tax preparer is cooperative and organized, the financial documentation needed to support his or her tax return can be accepted by the IRS. This can lead to a less stressful and successful audit process.
3. Avoid Hosting an IRS Tax Audit
This is the answer to the question we posed at the beginning.
Often, the IRS will ask that the audit be carried out at the taxpayer’s place of business or home. This is known as a ‘field audit’ and is the most intrusive of all audits carried out by the IRS. In such an audit, the IRS can get access to testimony of family members and personnel as well as documentation that would otherwise not be available to the auditor. Accessing such information can lead to disastrous results of the audit.
Actually, it is alos recommended to also avoid hosting the audit at a tax preparer’s office. This is because unlike lawyers, conversations with tax preparers are not covered by the lawyer-client privilege. In the course of an audit, a tax preparer may be required to disclose conversations he or she may have had with the taxpayer.
4. Ask for an Extension When in Doubt
In an audit, the IRS will typically inform a taxpayer of a certain response deadline. Some people make the mistake of responding too quickly to the request, fearing that missing the deadline might cause problems for them during the audit. In case someone has not had the opportunity or time to review his or her documentation before sending it to the IRS, it is advisable to ask for an extension. If the taxpayer is cordial and cooperative, the IRS can agree to the extension.
5. Research the Tax Laws
In order to survive an IRS audit, a taxpayer will often need to know the relevant tax law concerning the issue being challenged by the IRS. One should never attend an IRS audit unarmed and blind as it would give the auditor an upper hand during the audit. There are several free resources found on the internet that can help a taxpayer understand the relevant tax laws. Good places to start include the IRS publications, the internal revenue code and the internal revenue manual.