So, you’ve just received a letter from the IRS informing you that you are being audited. Stay calm, and don’t panic! IRS audits aren’t as bad as you might think. That is, if your’re properly prepared and ready for the challenge that awaits you. An important consideration will be the decision of whether or not to retain counsel for representation in the audit.
The Internal Revenue Service utilizes several examination techniques to determine the accuracy of tax returns. Computers are utilized to verify computations shown on each return. If it is determined that the computations are incorrect on a return, a notice is issued to the Taxpayer adjusting the amount of taxes on the return. Correspondence audits are initiated by the issuance of letters to the Taxpayer requiring verification of deductions and/or examinations shown on a return. Office audits are conducted in local Internal Revenue Service offices. Field examinations are conducted by Revenue Agents of more complex returns.
The use of correspondence audits by the IRS has increased substantially over the past ten years. Correspondence audits are used by the IRS to obtain additional information from the Taxpayer about a few limited issues on a return. The correspondence audit is most often focused on narrower issues than a traditional office audit and is conducted by mail or other written communications, making them less expensive for the IRS. Some examples of the kinds of items that can which can be verified by a correspondence audit are itemized deductions such as interest, taxes, charitable contributions, medical expenses, and simple miscellaneous deductions. Issues other than itemized deductions may be examined if they are a single matter which would not be appropriate for an office audit or field examination.
In an office audit, the IRS interviews the Taxpayer and inspects the Taxpayer’s records at an IRS office. The office audit commences with a notice to the Taxpayer requesting his or her appearance at an IRS office on a certain date. The letter will typically list a series of documents which the Taxpayer must bring to the audit. When the letter arrives for an office audit, the Taxpayer may request that a proposed audit date be changed to a more convenient date. The most frequently examined items in an office audit include casualty and theft loss, charitable contributions, employee business expense, interest expense, medical expense, miscellaneous expenses, moving expense and rental income and expense.
Field audits are normally initiated by a telephone call or a letter from a Revenue Agent. Unannounced visits from Revenue Agents are rare. The field audit is generally known as such because the examination is conducted at the Taxpayer’s place of business rather than an IRS office. There may be circumstances under which a Taxpayer may request a transfer of the place of examination from one place to another, including the office of the Taxpayer’s tax attorney.
The Tax Attorney’s Role
The IRS and other tax agencies have broad powers to examine the Taxpayer’s financial papers and records. Accordingly, it is imperative that the Taxpayer be prepared, organized and thorough in her or his response. By consulting with a tax attorney at the outset of an audit, the Taxpayer can learn what to expect from the IRS and be best prepared to answer or not answer the questions of the auditor. Learning the complex tax law related to a tax audit is not always possible, the tax attorney will be able to provide counsel in this area. An attorney can go to an IRS audit in the place of the Taxpayer. Representation by a tax attorney rather than an accountant provides includes the additional advantage of the attorney-client privilege. Generally, statements that you make to your tax attorney cannot be revealed to the IRS, or anyone else without permission. While there is a limited federal accountant client privilege, it doesn’t apply if the IRS decides to bring a criminal tax case against you.