IRS Tax Audit Help

An IRS audit is an examination/review of an individual’s (or an organization’s) financial records and accounts. The purpose of an audit is to ensure the information is reported correctly in compliance with the tax law and to inspect whether the reported amount of tax is correct.

The IRS can include any tax refund and returns filed within the last 3 years in an audit. If they identify a substantial error, they may add additional years (usually no more than 6).

The Internal Revenue Service sometimes finds cause to investigate a tax return. If you receive a written request in the form of an audit letter, it doesn’t necessarily imply you’re guilty of something. Being selected for an audit doesn’t always suggest there is a problem.

According to the IRS’s website, they use a few different methods when determining who will be audited:

1. Random selection & computer screening 

This means that the selection is done based on a statistical formula. The tax software compares your tax returns against norms for other similar returns. These norms are developed from audits of a statistically valid random sample of returns.

2. Related examination

The IRS may select your tax returns if they involve issues (or transactions) with other taxpayers, like business partners or investors, whose tax returns were selected for an audit.

Usually, a notice from the IRS that informs you that you’re being audited will arrive in the mail. The rest of the process can be managed through mail or through an in-person interview so an agent can inspect your records, depending on the type of audit (see below for more info).

For example, this interview can be conducted at an IRS office if it’s an office audit or at your home, place of business, a tax attorney’s office, or an accountant’s office in case of a field audit. All the information will be provided in the initial mail you receive that notifies you of the audit.

In the case of an audit that’s managed solely through the mail, you will be informed of exactly what you need to collect and forward, such as your income, expenses, and itemized deductions.

You have the right to request a face-to-face audit if you have too many books and records to mail. Use the contact information provided in the first audit letter you received to set up a date, time, and place. But it would not be wise to do it without a professional tax expert at your side.

There are three types of IRS tax audits:

1. Correspondence Tax Audit

This is the most common type of IRS audits. A correspondence audit requires you to provide information (and documentation) to support the information on your tax return. This includes income, expenses, tax credits, and tax deductions.

The initial IRS notice is usually the IRS letter 566. This letter contains inquiries about specific items on your tax return. It also provides a deadline for your reply.

In case you fail to provide the IRS with the necessary information within the allowed time or you ask for more time, the IRS will send you another letter where they explain the changes they’re proposing to your tax return.

The most common reason for a correspondence audit:

In general, one of the common reasons for a tax audit of this type is when the IRS records do not match what you reported on your tax return. Sometimes people make mistakes on their tax returns or sometimes the incorrect information was deliberate.

In case you made an honest mistake and the IRS determined that you owe additional taxes and/or penalties, there are two options as to how to proceed. You can either pay the additional amount due or appeal it and continue to the next step of the audit process.

2. Office Tax Audit

In an office audit, you receive a letter from the IRS in which they ask you to gather specific documents. They provide a list of the necessary documents and once you collect them all, you’re required to bring them to your local IRS office (hence the name), where you will go over them with an IRS examiner.

This type of tax audit is usually used for self-employed people, individuals, and small businesses whose tax returns have serious issues. The IRS has a tendency to audit small businesses rather than individuals because business returns are often a chance for people to pad deductions, write off personal expenses, additional income, employ relatives that don’t actually work, and similar schemes made to avoid taxes.

This issue has become so serious that the IRS announced plans for a 50% ramp-up in audits of small businesses in 2021.

If you receive an office audit letter and you know you can back up all the income, deductions, expenses, and credits on your return, compile the documentation then give us to call. We will go over your documents to ensure everything is in order and represent you before the IRS.

3. Field Tax Audit

This type of tax audit involves an IRS revenue agent (or multiple agents) coming to your home or place of business. A field audit is generally more common for businesses rather than individuals. The IRS agents want to inspect your records to get better insight into how your business works.

Although it’s more of a business tax audit, it’s not unheard of that the IRS targets an individual for a field audit. This happens especially if they have reason to suspect you have significantly underreported your income, tried to avoid taxes, or that you owe taxes.

On top of that, visiting your place of business or your home gives the IRS revenue agent a chance to compare your lifestyle to the income you’ve been reporting on your tax returns, and whether you might have any extra, unreported income.

If you have hired a tax professional, it is within your rights to request that the field audit take place at their office. And if you don’t have one, it would be wise to hire us for a field audit. Our expertise in tax law as well as our experience in dealing with IRS auditors will help ensure the best possible result for you. We will answer all the questions you might have and certainly help take a lot of pressure off of a stressful situation.

Once you receive the letter, you have 30 days to respond to the audit notice. Do not ignore the deadline as the time you spend ignoring the notice can increase the interest on the amount you owe to the IRS.

During this time, you will have to gather all the documents that the IRS listed in the letter. You will also have to make sure you understand the problem and you will have to decide whether you want representation from a tax professional.

While collecting the forms the IRS requested, make sure you have the copies, not originals.

Organization is key with any tax audit, so prioritize it and ensure all the paperwork and your personal finance are in perfect order. Don’t forget to check the year in each document so that it coincides with the tax year that is under audit. In case you have misplaces certain papers or records, get on it as fast as you can–we can immediately call and request duplicates.

Here is a list of the types of documents you may be asked to gather:

• Home mortgage statements
• Receipts
• Previous tax returns
• Brokerage statements
• Pay stubs
• Retirement account records

It would be a smart move to hire a tax professional to go over your tax documents and discover any discrepancies. This saves you any tax liability and provides an audit defense you will certainly need.

Although the IRS will include the forms and specific documents you need to prepare in the notice letter, here is a list of the records they might request, just so you know what to expect.

If you’re not able to gather absolutely all the necessary paperwork for the upcoming audit, don’t worry, there is a solution to your problem. You are certainly not the first person to do so. In reality, many small business owners get behind on record keeping.

The issue of incomplete financial records for an audit is so huge that the United States tax court established a rule that allows all taxpayers to recreate expenses in case direct records don’t exist (the so-called Cohan rule).

The Cohan rule states that in the absence of receipts or other proof of business expenses, a taxpayer is allowed to create an estimate for those expenses which they can later use to claim tax deductions and credits. These estimates need to be reasonable. If you’re trying to estimate a certain product you’ve bought for your business, you’ll do so based on the market value of the said product.

It’s important to know that the Cohan rule should be thought of as last resort and used only when there is no other way to prove a business expense. And there are no guarantees that the IRS will accept it in your case.

What’s more, the rule does NOT apply to:

• Travel expenses
• Entertainment expenses
• Gifts
• Certain types of property listed in section 247(d) of the United States Tax Code

Even if you cannot gather all the receipts and other paperwork, make sure to do all that’s in your power to gather as much as you can. Here are a few methods you can try in such a situation:

Reach out for copies of receipts

Get in touch with vendors and suppliers from which you made a purchase. You may be surprised how many of them can issue you a copy of a receipt or invoice thanks to the digital point-of-sale and invoicing systems. The same thing applies to charitable contributions.

Review your credit card and bank account statements

Although it’s not as good as having the actual receipt, a line in the bank account statement or credit card statement can make your case. It’s certainly better than nothing when you want to prove that your expense was legit and real.

Check your calendar

Try to find a purchase date in your calendar or appointment book. Being able to pinpoint where and when you made a purchase is at least a start.

If the audit is happening face to face in an IRS office, your home, or your place of business, it’s important for you as a taxpayer to know your rights. For the actual appointment, you have the option to attend it by yourself or you can opt for representation to attend in your place or together with you.

Whatever the case, you have to know about these rights during an IRS tax audit process:

• A right to professional and courteous treatment by the IRS employees.
• A right to confidentiality and privacy about tax matters.
• A right to know why the IRS is asking for information, how they will use it and what will happen to you if you fail to provide the requested information.
• A right to representation (if you wish).
• A right to appeal disagreements within the IRS and before the court.

Here again is where hiring a tax professional like us is the prudent thing to do, because we’ll make sure all of your rights with the IRS are protected and that the IRS doesn’t pressure you into saying or doing something that makes the situation worse.

If the entire audit process is managed through the mail instead of in person, there are still a few things you have to know. One of them is how to write a response letter.

For tax audits that are conducted via mail, it’s best to get in touch with a tax professional that can help you write up the letter correctly. A tax professional will know exactly how to respond based on your set of circumstances and the reason for your audit.

Although it may be tempting to write the response letter yourself, keep in mind it needs to be without flaws. You will have to dot every i and cross every t, which is easier said than done. A correctly written response letter can quickly expedite a resolution to your examination, whereas one mistake can delay it or make it much worse.

Here is a list that will give you a general idea of what this letter should contain (your tax representation of choice will already know all about this):

• Full name
• Tax ID number
• Contact information
• Employee ID
• Business ID (if necessary)
• The name of the IRS agent (auditor) who is in charge of your case
• Your response to the items in question
• A complete set of supporting documentation

An IRS audit can end in three ways: no changes, agreed-upon change, or changes with which the taxpayer disagrees and makes an appeal.

If you’ve had an in-person interview, once it is done, the auditor will give you a computer-generated audit examination report that will include the audit findings which will state the amount of the additional tax assessed along with an explanation of how your return will be changed, and options for the ways you can appeal the report. When you sign the report, you are giving up the right to go to Tax Court.

You don’t have to sign it if you’re not 100% sure you agree with it. In that case, you should request to speak with the auditor’s supervisor who can further review the documentation. After this, you can appeal the decision, ask for assistance from the Taxpayer Advocate Service and go to court.

The penalties and tax deficiencies after most audits add up to an unaffordable tax bill. In this situation, a taxpayer has three options:

1. An extension request

Find the number listed on the IRS bill and call it to ask for a short-term extension. You should do this only if you are able to pay in full within 120 days. If not, this option is not for you.

2. A monthly payment plan

If the first solution is not an option for your case, you can go to the IRS website and apply for a monthly payment agreement. These dues can be set up as automatic payments from a debit account.

However, when a taxpayer attempts to do this on their own, usually the payments are excessive and hardly affordable. Which again is why hiring us to help you from the start can save you thousands of dollars.

3. Offer in Compromise

The last option is an Offer in Compromise, an agreement to settle the debt for less than the amount you owe. For this one, you will need to prove financial hardship to become eligible.

The vast majority of people that submit an Offer in Compromise get rejected because they don’t understand how the process works or the requirements for acceptance. Here again is where our expertise can be an incredible asset.

Receiving an IRS audit notice in the mail can come as quite a shock, and as you can see, an IRS audit is very involved and complex. On top of it all, saying or doing the wrong thing can make matters worse.

But you don’t have to go at it alone–and you shouldn’t!

Here at Innovative Tax Relief, we are at your disposal for all your tax-related concerns and legal advice. Hire a tax professional to guide you through your IRS audit and protect your rights and your money.

Get in touch with us today for a free tax consultation, tell us all about your IRS problems, and start finding relief from them today with our help.