Receiving a notice of IRS audit can be very unnerving. You’ll likely read and re-read the letter numerous times, or you may stick it in a drawer and hope it goes away. You may call the IRS to confirm you didn’t receive the message in error. An audit? Why? What did you do wrong? What’s going to happen to you or your business?
If you remember only one piece of advice regarding an upcoming audit, let it be this: Do Not Panic. Fear most often comes from a lack of understanding, and the steps you’d take in fear rarely do much to improve your situation. In fact, in many cases, IRS audits are resolved without the taxpayer owing money to the government… and in some cases, even getting a refund!
Consider whether or not your audit may fall into one of these very common, easily resolved situations:
Scenario 1: Random Selection
The IRS relies heavily on computers to process the billions of pieces of financial data it gets on a yearly basis. It also relies on teams of human agents. Both resources are prone to mistakes, which is why the IRS selects some taxpayers at random to check their internal performance. As well, random audits help the IRS identify tax compliance issues or unclear tax statutes to address in the future. Your audit may be the result of a statistical formula your filing happened to match.
Scenario 2: History of Errors
We all make mistakes… especially on tax forms, which can often be confusing. While the IRS encourages accurate reporting, even if it means filing amended returns or reports, you may have drawn attention to yourself or your business if you’re constantly re-filing corrections in your favor. If these were all documented properly, then you have nothing to worry about.
Scenario 3: Red-Flag Deductions
From time to time, the IRS decides to take a closer look at a certain type of deduction that they think is being abused or used in a fraudulent manner. For example, a few years ago, the IRS started looking carefully at home-office deductions as many homeowners were taking this deduction, but were also employed in full-time jobs and were not filing any return from a home-based business or reporting any income from that business. During that period of scrutiny, many legitimate home-based businesses were also audited. So it may be that your tax situation is one to which the IRS is paying special attention.
Three Types of IRS Audits
No matter what the cause of your audit selection was, the IRS conducts three types of audits.
A “Correspondence Audit” is typically handled completely through the mail and usually means that a certain piece of information is missing or needs additional documentation to verify. Send the requested materials and your situation may be resolved that easily. Most audits take place via correspondence.
In an “Office Audit” you will meet with an IRS agent face to face in order to clarify irregularities they have uncovered. Having a tax defense attorney represent you at this meeting is highly recommended.
It is only the “Field Audit” that places an agent at your home or business for a full investigation and these are rare unless you owe significant amounts of money or have been involved in suspected criminal activity. Should you find yourself in this extremely uncommon scenario, it is critical that you have a tax defense attorney on your team.
The bottom line is simple: Don’t Panic. Chances are that your IRS audit will be resolved with little difficulty. And even if it’s not, an experienced tax defense attorney can guide you every step of the way. Please contact us today to learn more!
Written by E. Morgan Maxwell
Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.
