How Does the IRS Determine Who to Audit?
The IRS audits tax returns based on a formula that indicates which returns are more likely to have errors. This means that an IRS audit does not mean that you made errors on your tax return – you might just have had the bad luck to have your return picked for audit. If you filed your return based on the tax law and you have all of the documentation to support the numbers on the return, it is possible that the IRS audit will end without you owing any additional tax.
IRS audits can be intimidating. We recommend that you take a deep breath, read the IRS letter carefully, and evaluate what the IRS wants from you. The letter should identify the tax year in question, the item(s) on your tax return that they are concerned about, how to reply, and when to reply. Gaining an understanding of what the IRS is looking at and making an action plan to address it can help relieve the stress of an IRS audit.
Once you have read the letter and you know what they are looking at, the next thing to do is review your records and documentation. This will allow you to determine if you can respond on your own or if you should seek guidance from a tax professional.
If the IRS issue feels straightforward to you and you understand what they are looking for, you may be able to respond without assistance. This often makes sense if the issue is not complicated, and you are confident of what was reported on your tax return. For example, let’s say that the IRS is auditing a deduction you took because you paid for an insurance policy for your business. If you have a policy that shows that the insurance was an ordinary and necessary expense for someone in your field, and the receipt for paying for it, you could potentially resolve that issue by providing the IRS with that information.
On the other hand, if the IRS is auditing issues that are more complicated, if you realize you made a significant mistake, or if you are just not a numbers person and are not sure how your records support the amounts on your tax return, it might be a good time to hire someone to help you.
If you have an accountant who is familiar with your return, and you feel that your return is straightforward, they might be the right person to help you. Further, some tax preparation companies provide audit protection (often for an additional fee), which is a service that guarantees that they will help you with certain IRS issues. If your return was prepared by a company that provides audit protection and you purchased it, you may want to contact that company to see if they can assist you.
However, if you are concerned about significant mistakes, complicated issues, or possible criminal liability, you should strongly consider hiring an attorney who specializes in taxes. For more complex situations, attorneys have several advantages over accountants. Attorneys are adept at researching the law to determine the arguments that could be made to support your tax position, as that is a main focus of many law practices. In contrast, accountants focus on financial transactions and preparing tax returns. If there are complicated or gray areas in the audit, having representation that is strong in researching issues and advocating for clients may result in a better outcome.
Importantly, if you are concerned about potential criminal liability, do not talk to an accountant. While there is an accountant-client privilege in Internal Revenue Code Section 7525, this privilege does not apply to situations like criminal issues or tax shelters. If you talk to your accountant about criminal matters, they may be compelled to testify against you. Attorney-client privilege does not have the same limitations as accountant-client privilege.
An Experienced Tax Attorney from Komor Tax Law Can Help With Your Audit
In summary, if you are being audited by the IRS, gain an understanding of the issues, determine if you need help, and make a plan of action. As you do this, make sure to comply with IRS deadlines, so they do not make decisions without the information you would like to provide.
If you are facing an IRS audit and would like to discuss how we can help, contact us for a free consultation.