Audits are meant to be intimidating. The government expects taxpaying citizens and businesses to remain in compliance with the Internal Revenue Code for fear of the invasive and tedious prospect of an investigation into the inner workings of their finances. Further, when the IRS goes looking for noncompliance, they have a habit of finding it.
People in the field of tax law know that there are a number of indicators to IRS agents that might trigger an audit. This article will explain some of these triggers, as well as some ways to prevent them ahead of time, reducing the chances that you are subjected to an audit. If you are already in the process of being audited, you may have some questions about what to expect out of the process. We will discuss the three main types of audits and the expected results and timeframe of each. If you are not happy with the results of your audit, we will go through the process of appealing the findings of your audit.
CPA Ted Kleinman provides aggressive, experienced audit representation for taxpayers across the globe, including U.S. citizens, resident aliens, nonresident aliens, U.S. expats living abroad, and U.S. and foreign companies. If you or your business has been selected to undergo auditing by the IRS or state tax authorities, Ted Kleinman can help you gather and evaluate financial documentation, represent you in all proceedings, work to mitigate potential penalties and protect your legal rights throughout the audit process. Whether you have been chosen for a correspondence audit, an office audit, a field audit, or any other type of state or federal tax audit, look to US Tax Help for dedicated service you can rely on. Contact us online for a consultation, or schedule an appointment today.
IRS Audit Triggers
There are many reasons that you or your business might have been chosen for an IRS tax audit. While some audits are triggered by random computer selection, many are initiated because the IRS believes there is an unresolved issue in need of closer examination. Typical suspected issues that might lead the IRS to investigate include unfiled returns, the tax credits you claimed, or the financial information you supplied regarding U.S. or foreign income. The following factors can all increase your odds of being audited:
- Claiming large or numerous tax deductions, particularly deductions for business expenses, charitable contributions, or medical expenses
- Doing business with companies or individuals who have been audited in the past
- Earning a high level of income, particularly above the $200,000 threshold
- Having foreign income or bank accounts, including overseas checking, savings, or business accounts
- Improperly deducting hobby losses on your tax return
- Operating a business that conducts most of its transactions using cash instead of debit or credit card payments
- Owning your own business or being self-employed
- Reporting substantially higher or lower income than you did on the previous year’s income tax return
- Sending large amounts of money into the United States from a bank outside the US
- Supplying outdated or incorrect personal information, such as the wrong Social Security number (SSN), on your tax documents
IRS Audit Process
The tax audit process varies slightly from one case to the next, not only due to differing reasons for taxpayer audits, but also because there are several different types of audits for which you may be chosen. The three main types of IRS audits are correspondence audits (or mail audits), office audits, and field audits.
As the name suggests, a correspondence audit is conducted through the mail. The IRS may request that you supply various financial records and statements to corroborate the information you provided on your tax return. For example, the auditor may wish to examine invoices or receipts. Because it is the simplest type of audit, a correspondence audit is typically used to resolve errors and issues that are relatively minor in scope. Due to their milder nature, mail audits usually conclude in six months or less. Nonetheless, the potential for penalties or a more intensive examination makes audit representation essential.
It is also important that you abide by the appropriate timeline in your response to a correspondence audit. Failure to provide the requested information in a timely manner is akin to failing to provide it at all in the eyes of federal regulators. To meet the time requirements of a correspondence audit, it can be very helpful to have all the information that you may need readily available. The best way to ensure that you are prepared is to institute a clear and organized record keeping system. If you are worried that you do not have the necessary level of organization to deal with a potential audit when it arrives, the professionals at US Tax Help can provide you with options and help you select the one that works best for your situation.
An office audit is more involved than a correspondence audit. As the name again suggests, office audits are conducted at various IRS field offices throughout the U.S. Your presence will be requested at the field office that is usually chosen by proximity to your stated address, though you may request to have your office audit conducted at a different site if making the change would be reasonable and convenient. The office audit usually requires you to bring copies of the requested records along with you, but you may want to ask if you should also submit any records by mail beforehand.
A qualified personal representative, such as a CPA, may be able to attend the office audit on your behalf. Even in instances where your presence is required, you are always permitted to have the help of a CPA or tax audit attorney during your office audit.
Office audits go into deeper detail than correspondence audits. As a result, they typically take longer than mail audits to resolve, but only fractionally. The typical office audit will finalize in less than one year, provided that you are cooperative with the audit along the way.
A field audit is the most intensive and invasive type of IRS audit. The IRS typically calls for field audits in situations where the IRS believes that substantial noncompliance has occurred. Instances that indicate substantial noncompliance include situations where the IRS suspects that particularly large sums of money are being withheld, or that the taxpayer is willfully attempting to deceive the IRS or conceal income. Penalties assessed for violations involving willful evasion of tax liability are the most serious in tax code. Six figure fines and prison time are common sentences. With so much on the line, the IRS will often determine that their most rigorous investigation is necessary.
In a field audit, the auditor may visit your place of business or even your private residence to collect and investigate various financial records. The process may take anywhere from a day to more than a week, depending on the scope and complexity of the audit. You may only hear a resolution to your field audit over a year after you initially receive notice. The IRS is limited to 27 months from the beginning of the audit to render its findings by their own representative guidelines.
What if I Disagree with the Audit Results?
There are three possible outcomes to an IRS audit:
- You are able to verify all of your information with the requested evidence. The IRS does not require you to take any further action.
- The auditor determines you are liable for additional taxes or penalties for tax code violations. You agree with the findings, and make arrangements with the IRS for paying the amount you have been determined to owe.
- The auditor determines you are liable for additional taxes. However, you believe the auditor made a mistake.
If you believe the auditor made an error, there are several actions you can take to dispute the findings. Depending on the circumstances, there are three possible courses of action: conference, alternative dispute resolution, or an appeal.
Conference to Dispute Findings
You may ask for a conference with the auditor’s manager. This is known as a “supervisory conference.” In this conference, you may freely state the nature of your dispute with the findings. The notes of the conference may be recorded for posterity, and you may choose to have a CPA or tax attorney present.
Alternative Dispute Resolution Program
You can explore the IRS’ alternative dispute resolution (ADR) programs, such as appeals mediation, with help from a tax attorney or CPA. Mediation is a confidential, relatively informal session between the taxpayer and a trained mediator called an “appeals officer,” whose role is to oversee and facilitate the proceedings as a neutral party.
If all else fails, you can file a formal appeal, provided enough time remains with regard to the statute of limitations. If you owe less than $2,500 in total, you may just ask your auditor directly for an appeal. Otherwise, you will typically need to submit a written letter of protest. Your letter of protest needs to contain specific types of information in order to be considered, including, but not limited to, your contact information, a statement that you wish to appeal, the findings you disagree with and why, and the laws or facts which support your argument.
You will then have a hearing in front of an Appeals Officer, who is an employee of the IRS and not a federal judge. You may appoint a CPA, tax attorney, or another tax professional to act as your representative during the IRS appeals process. This representative may help you draft and submit your written letter of protest to ensure that you have the required information and content for your argument.
If you are not satisfied with your formal appeal hearing decision, you still have the ability to appeal your audit results to an actual court. Appeals Officers are instructed to avoid this possibility at all costs, so it is likely that they will offer you a settlement at some point during your initial appeal. You may have your CPA or legal counsel examine the settlement language to ensure that the terms are favorable for you.
IRS Tax Audit Representation for U.S. Expats and Foreign Nationals
Whether you live and work inside or outside of the United States, the IRS is extremely vigilant when it comes to ensuring the timely reporting of foreign and U.S. income. The IRS coordinates with government agencies and financial institutions all over the world, using state-of-the-art technology to detect suspicious and unusual activity. Failing to file personal or business tax returns, failing to report all of your worldwide income, improperly claiming credits or deductions, or simply earning a high level of income can all lead to a tax audit, with potential for disastrous consequences.
If you have been chosen for an audit, whether by the IRS or a state tax authority, the time to begin preparing your audit defense strategy is now. For a consultation with an experienced CPA, contact US Tax Help online, or call (541) 362-9127.