There aren’t many experiences that can be more unsettling than receiving an IRS tax audit notice. The stress of financial uncertainty as the audit looms over you, … the daunting task of digging through years of records to substantiate tax return positions, … the struggle to recall events from many years earlier as you try to piece together your “story.” Whether it’s trying to drudge up Salvation Army charitable contribution receipts for those old suits you donated that hadn’t fit you in decades, or gathering the documentation and the financial analysis for a complex business transaction, it's important to approach this situation with composure and take the necessary steps to protect your rights and navigate the audit process smoothly. As tax attorneys with decades of experience representing clients facing IRS tax audits, we have put together a bullet-point list of valuable insights and practical tips to help you through the labyrinth of an IRS audit with confidence.
1. Read the Notice Carefully: Upon receiving an audit notice, take a deep breath and read the notice thoroughly. It will typically contain essential information such as the type of audit, tax years under review, and specific items or areas of concern. Sometimes, the audit notice will be accompanied by an Information Document Request (“IDR”) which will lay out the specific issues the IRS is looking to investigate. Understanding the nature and scope of the audit is crucial as it will guide your next steps.
2. Engage Professional Assistance: DIY is not a recommended approach for dealing with an IRS audit, especially if you do not have the requisite financial, accounting or tax experience to deal directly with the IRS. The government’s examination powers are broad and vast; any slip-ups in communicating with the IRS could lead to unintended consequences such as expanding the scope of the audit to other issues or even other years. It’s imperative to have a tax professional representing you, and not just any tax professional who may specialize in different areas, but a tax attorney or other tax professional with the requisite procedural experience in dealing with the IRS. They can provide expert guidance, help you prepare for the audit, and act as a buffer between you and the IRS. Their expertise will ensure that your rights are protected.
3. Gather and Organize Your Records: The success of an IRS audit largely depends on your ability to provide accurate, organized and comprehensive documentation to support your tax return positions. Start gathering all relevant records, including receipts, invoices, bank statements, and other supporting documents. Organize them in a systematic manner SPECIFICALLY RESPONSIVE to the IRS auditor’s inquiry to facilitate easy access and retrieval during the audit. The inclination to be a “good citizen” or a “good taxpayer” and provide more information than is requested can backfire dramatically (see bullet point 6., below).
4. Review and Evaluate Your Tax Return:
Thoroughly review your tax return for the audited year(s) and assess any potential errors or inconsistencies. Be prepared to explain any unusual entries or deductions, ensuring that you have a clear understanding of the positions taken on your return. If you identify any errors, consider filing an amended return before the audit.
5. Respond to the Audit Notice within the Stipulated Timeframe: Complying with the timelines outlined in the audit notice is critical. Failure to respond within the given timeframe may lead to additional penalties or even a default assessment. If you require more time to gather necessary documents or seek professional assistance, promptly request an extension in writing, ensuring you provide a valid reason for the delay. Auditors often have their own internal guidelines to move their cases along from management, so they are often cooperative with first-time extension requests, but there are no guarantees thereafter. Moreover, if the IRS feels the Taxpayer is not being responsive to their information requests, they have “Summons Authority” to seek information through third-party summonses (i.e.., banks, financial institutions, customers of the Taxpayer’s business) requiring the third parties to provide the information. This can be extremely embarrassing to the party being audited.
6. Be Cooperative and Transparent: During the audit, it's essential to remain cooperative, honest, and transparent with the auditor. Provide the requested information promptly, but do not offer more than what is required. Any additional information provided over and above what is specifically requested may contradict, or otherwise be inconsistent with what the IRS already knows. This could raise red flags and ultimately open up new issues, or even new tax years for examination. It is crucial to stick to the relevant facts and avoid volunteering any additional information that could potentially complicate the audit process.
7. Understand Your Rights: Familiarize yourself with your rights as a taxpayer, including the right to representation, the right to appeal, and the right to confidentiality. Knowing and asserting your rights can help ensure a fair and just audit process.
8. Document All Communication: Keep your own “audit log” by maintaining a record of all communications with the IRS, including dates, names, and content. This documentation can serve as valuable evidence in case of any discrepancies or disputes that may arise during or after the audit.
9. Review the Auditor's Findings: Once the audit is complete, carefully review the auditor's proposed findings and adjustments. If you disagree with any adjustments, consult with your tax attorney to determine the best course of action. You may have the right to appeal the decision or seek resolution through alternative dispute resolution methods. Conclusion: Receiving an IRS audit notice can be intimidating, but with the right approach and professional guidance, you can navigate the process successfully. By reading the notice carefully, seeking professional assistance, organizing your records, and understanding your rights, you'll be well-prepared to face the audit with confidence. Remember, a tax attorney with appropriate and relevant experience in IRS Tax Controversy can provide valuable support and help protect your interests throughout the audit process.