One of the new realities for U.S. taxpayers includes the responsibility for managing an IRS correspondence audit. What should you do if you are contacted regarding any form of IRS audit? Did you know the present majority of IRS audits are known as "correspondence audits?" What is a correspondence audit, and how should you manage any request for information from the IRS?
3 Most Important Things to Know about an IRS Correspondence Audit:
- The combination of new, advanced data processing systems powered by Artificial Intelligence (AI) and substantial layoffs has resulted in an increase in IRS "correspondence audits."
- An IRS correspondence audit is managed entirely through mail between the agency and the taxpayer or the taxpayer's representative, and has become the most common form of IRS audit.
- These inquiries must be taken seriously, and you should seek the advice and counsel of an experienced tax attorney before responding to the IRS's request for additional information or clarification.
- Failure to successfully manage the request(s) contained within an IRS correspondence audit will most likely result in an "office audit" at a local IRS office or a complex field audit.
Have You Received a Letter From the IRS Requesting Information and Suggestions of Discrepancies Between Your Tax Return(s) And Information the IRS has received from Other Sources?
If you receive a letter from the IRS, it is essential to review and analyze the information requested carefully, as well as the reason for the inquiry. This is also a time to reach out to an experienced tax attorney who can provide insight and advice on your unique circumstances, and manage all communications with the agency on your behalf.
Many Americans and U.S. taxpayers are aware of recent layoffs and events within the IRS. This has led many taxpayers to the false belief that there will be fewer resources to investigate individual returns, resulting in fewer audits. This is not the case.
The IRS has recently invested heavily in state-of-the-art computer systems and Artificial Intelligence (AI) applications that enable the agency to efficiently sift through the substantial flow of information coming into the IRS from sources within the United States and around the world, and tie it back to individual U.S. taxpayers and their returns.
Sources of this electronic information include, but are not limited to:
- U.S. Banking and Foreign Financial Institutions or FFIs, including unique U.S. taxpayer identification numbers, account numbers, balances, and even transactions, investments, and holdings.
- Cryptocurrency wallets and exchanges
- Gig and rental platform reporting from sites such as PayPal, Venmo, Etsy, eBay, Amazon, Cash App, Grubhub, DoorDash, Uber, Lyft, and Airbnb.
- Foreign Tax Authorities based upon Bilateral and Multilateral tax treaties.
- Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC), tax agencies from around the world sharing information with the specific purpose of prevention and identification of tax avoidance.
IRS AI applications easily separate all information associated with an individual U.S. taxpayer or entity, compare it to the information provided on the related return, and flag any differences or omissions. Even the process of initiating an investigation and contacting the U.S. taxpayer for a correspondence audit is heavily automated.
If you have been contacted by the IRS or any state tax agency, they likely have information or questions that contradict the information you've provided in previous tax returns. You are at a much higher level of legal and financial risk than you might initially perceive. This is why it is crucial to consult an experienced tax attorney immediately before responding to any communication or request for clarification from the IRS or other tax authority.
Have you received a request for information from any tax authority, including the IRS? If you are contacted by the IRS or any other tax agency regarding any form of inquiry or audit, you need the advice and counsel of an experienced tax attorney. There are several essential issues you need to become immediately aware of, such as the importance of the attorney-client privilege and how that protects you from the IRS.
Carefully Managing an IRS Correspondence Audit to Reduce Legal and Financial Risk
How important is carefully managing an IRS correspondence audit? Should you respond immediately to the IRS and provide all the requested information?
You need to understand the risks you face as a taxpayer whenever the IRS contacts you. It is rarely in a U.S. taxpayer’s best interests to communicate directly with the IRS - either in writing or on a phone call - or provide any information without first consulting an experienced tax attorney. Managing an IRS correspondence audit requires prudent analysis and specific communications and responses. The agency has already developed a specific strategy for your audit based on the behaviors or information you initially provided, as well as the amount of revenue the IRS intends to generate as a result of the correspondence audit.
It is essential to keep the scope of the investigation or correspondence audit limited, thereby reducing associated risk and ultimately the amount of money you may be required to pay.
It is also important to note that it is only possible to appeal the information that is contained in the “folder” of any IRS audit. An experienced tax attorney works to restrict the information provided to the IRS while ensuring the greatest opportunity to appeal any adverse decision once the audit is concluded.
In addition, you need to be aware of the level of communication between the IRS, state tax agencies, and even foreign tax authorities. Any change(s) resulting from an IRS correspondence audit will be immediately communicated to any other relevant tax authority. This is why it is quite common for a state tax audit to follow an IRS audit, and vice versa.
Most taxpayers wouldn’t know which information they should or shouldn't offer in their response, or what to do if the IRS has requested to waive the Statute of Limitations associated with their audit. Strategic decisions must be made throughout the course of managing an IRS correspondence to reduce or eliminate potential risks and exposure. You need sound advice, information, insight, knowledge, and an informed strategy to protect your interests, limit or eliminate potential exposures, and prevent the scope of the correspondence audit from being expanded.
