I have an IRS Audit! — Should I be Worried?
An IRS audit is a review of supporting documentation that supports the taxpayer’s return and accompanying schedules submitted for a given tax year. The tax auditor will be attempting to verify if the taxpayer has correctly and accurately reported his or her income, expenses, deductions, and other data used to compile the tax return(s) in question. IRS tax audits can be conducted by mail (a correspondence audit), at the local IRS office (a desk audit), or at the taxpayer’s home, business or the office of the taxpayer’s accountant or tax attorney (a field audit).
It is a good idea to have a “Field Audit” in a tax lawyer’s office
Let’s face it, if facing an audit we’d prefer a correspondence audit, as it may be a desk-bound IRS staffer who needs to verify some unanswered or confusing line items on your tax return. If the IRS audit is a field audit, it would be in your best interest to give the Tax Resolution Lawyer Paul Staley a call and have us contact the IRS on your behalf to inform them that their audit will be conducted at our offices and we will be your legal representative.
Having a field audit conducted in our offices will eliminate unnecessary and stressful interaction between you and the IRS field auditor if it were at your home or business. This would prevent the field auditor from making unneeded assumptions about you and your circumstances based upon their personal, subjective assessment of you, your home and your personal assets. It is far better to have the audit held in an anonymous, neutral office environment, where the field agent will show up, have a conference, and then leave without the possibility of making your case into a the agent personal “pet project.” Additionally, scheduling tax audit in our offices will significantly reduce the stress and anxiety that is bound to come by a government revenue agent violating your private space. Finally, scheduling the field audit in our offices telegraphs to the IRS that you are now being represented by tax professionals who will protect your rights while strongly advocating your position. There will be easier audit targets on the Agent’s schedule who would have a tax lawyer next to them for the agent to investigate — we want to encourage the auditor to get down to business, wrap up your audit, find mutual resolution and move on.
What will the IRS Agent be looking for?t
IRS audits come down to the IRS representative asking you to succinctly explain and document the nature of your income and for you to prove to them that you’ve accounted for all the income that must be legally reported. When you prepare for your IRS audit you need to double check that the income you reported on the tax return STILL matches your current figures. You need to double check to see whether you overlooked some income. If so, you will need to voluntarily disclose the corrected information and expect that your tax liability will be adjusted upward. Interest and penalties may also apply if it appears that you purposefully attempted to withhold the reporting of some income.
The IRS agent will expect you to substantiate with documentation, ALL expenses and deductions that you claimed on your tax return; that the deductions are legitimate. If some of your expenses and deductions cannot be adequately documented to the standards required by the IRS, then those expenses and deductions will likely be disqualified and subtracted. The result would be a re-calculated tax liability that could be greater than what your tax return originally stated resulting in additional taxes, interest, and possible penalties. Should the IRS assess additional taxes they will share their findings with their counterparts at the state tax agency and those upward adjustments will likely be matched by the State Tax Agency making an already stressful and expensive situation even more so.
Is there ever any upside to an IRS Audit?
Some IRS audits turn out to be a blessing for our clients. Especially those clients who might have calculated their own tax return or used a software program to assist them, but when preparing for an upcoming tax audit we find missed expenses and deductions. For any IRS audit you need to carefully prepare so that you can document and defend all possible challenges that may be presented to you or your legal representative at the audit.
Our Process – We will meet and review your tax return and your supporting documentation. Again, sometimes we will discover that you, your tax preparer, or your tax software missed some legitimate and legal opportunities for more expenses and deductions that were missed. When this is the case, we will prepare a new and more aggressive tax return with supporting documentation and keep it handy for the upcoming audit to use as a negotiating tool. After the IRS representative makes known the purpose of their inquiry, we can excuse ourselves and discuss your legal and strategic options with you, or by phone if you choose to not attend the audit. Many IRS audits turn out well for taxpayers who do their homework and prepare well.
All tax returns are scored by software for risk assessment.
Do you know that 80% of IRS audits are triggered by IRS Computer software that ranks tax returns and establishes a “risk score.” That risk score is affected by 100’s of various tests that all generate an aggregate risk score that determines the likelihood that your return will become part of the 1.11% of tax returns subject to IRS audit. Many of those line item “test scores” are affected by some IRS Red Flag Items that you can read about here on our website.
But WHY did the IRS target MY tax return for audit?
There are numerous reasons why the IRS will target your tax return for an audit. The IRS computer software select taxpayers (1) randomly, (2) by “document matching,” and (3) by computer risk assessment screening all returns for so-called “red flags” and then assigning each return a risk score. The agencies’ audit budget for that year coupled with the risk score that your return generates can make the difference of being selected or passed over. Some of the “red flags” that can trigger an IRS audit including, but not limited to:
- Making too much money
- Making too little money
- Choosing a sketchy tax preparer
- Owning a business
- Owning a cash business / working at a cash business
- Discrepancies between state and Federal returns
- Big fluctuations in income from year to year
- Large charitable deductions
- Submitting a handwritten tax return
27 IRS Red Flags that can Trigger an Audit READ HERE
Yes! – You can be randomly selected for IRS Audit
You may be one of the very few taxpayers that are randomly selected for an IRS audit. Only a small percentage of the 1.11% of all audits are randomly generated but there is always a certain number of random tax returns audited. While it will be the “luck of the draw” that selected your return, you will still experience the same stress and anxiety as you prepare for your audit. No matter the reason for an IRS audit, you may want to call a tax attorney for a quick review to see if there are reasons to be worried.
‘Document Matching’ can trigger an IRS Audit
Lots of tax returns are selected for audit because they come up short on the “document matching” process conducted by IRS computers which attempt to match what you report on your tax return against the forms filed by people with whom you do business. Those forms are from you work with or for in some capacity, or from a bank or stock brokerage. Those people and entities will have filed Forms 1098, 1099, W-2, and others. Generally you will get a copy of those forms and you would account for them in your tax calculations and voluntarily attach them to your tax return. Should the amounts reported to the IRS on those 3rd party forms not match what you report on your tax return, the computer will generally kick out the return for additional followup that might result in an IRS audit by mail, an audit at an agent’s desk at the nearest IRS offices, or a field audit at your home, your business, or your legal representative’s office.
Tips from informants and snitches can end in an IRS Audit
The IRS has a reward program to pay tipsters for information that results in significant money collected because of the tip. In fact, the IRS has a special form just for tipsters: IRS Form 211. Most “tips” are made by employees who have a beef with their employer, or from someone that you have shared that you are not reporting all your income and becomes jealous, vindictive or just wants to stir the pot. Sometimes it will be a customer who suspects you, as a business owner, are pocketing money and not reporting it.
Unfiled Tax Returns can result in an IRS Audit
Failure to file one or more tax returns can also lead to trouble for the taxpayer and trigger an IRS audit. The IRS might have a tax return generated for the taxpayer based on past returns and tables of average income for like work or profession. This is know as a “substitute for return” and will often generate a tax liability which is utterly arbitrary and may not be anywhere close to the tax you might owe had you filed. A “substitute for return” might even be generated when you legally fall short of the minimum necessary income level to even be required to file a tax return that year. Finally, if you should have filed one or more back tax returns and did not, we strongly suggest that you contact the Tax Resolution Lawyer Paul Staley and get his assistance in preparing and filing your unfiled tax returns as soon as possible to prevent an audit.
If you or your business is facing an upcoming tax audit, it is time to consider getting a professional Tax Resolution Lawyer on your side.
Get some help —Make that call!
San Diego Tax Resolution Lawyer Paul Staley provides a no-obligation, confidential consultation and has appointments available for evenings and weekends. We accept all major credit cards and can make other payment arrangements so that we can help you get your tax problems straightened out without adding additional layers of financial burden on you and your family. To talk with Paul or schedule a confidential free consultation call (619) 235-9645.