Why am I being audited by the IRS?

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An IRS Audit is designed to be an impartial review to assess tax return filing accuracy. IRS selects returns for audit to determine the reporting accuracy of income, expenses, and/or refundable credits.  Gathering and organizing information is essential to a Taxpayer under audit. The best way to withstand an Audit is for the Taxpayer to arm himself/herself with information.

How does IRS make its selection for an audit?

IRS states that its selection for an audit does NOT necessarily suggest that there is a problem. IRS uses several different methods for audit selection:

⦁    Random selection

⦁    Computer screening

⦁    Results of Prior Audits

⦁    Third Party Information

⦁    Entries on a Return

⦁    Related Examinations

How does IRS conduct audits?

The IRS manages audits either by mail (Correspondence Examination) or through an in-person interview.   IRS sentiment is that Correspondence Examinations are less burdensome for Taxpayers. Correspondence Examinations allow IRS to achieve a higher rate of audit in a less costly approach which is necessary under its low budget constraints.  In-person interviews via field audits (at the Taxpayer’s place of business, home or accountant’s office) or office visits (at an IRS office) are usually directed at more “affluent and complex” Taxpayers.    

How does the Correspondence Examination work?

During a Correspondence Examination there is “no tax examiner assigned to the case”.  According to the Taxpayer Advocate, “a computer issues a letter that tells the taxpayer to send in documentation to support his or her claim of an item on the tax return. The contact name listed on that letter is “Tax Examiner” and the phone number is that of the IRS Service Center unit that issued the letter. Each time the taxpayer calls to discuss the Correspondence Examination, he or she will reach a different Tax Examiner”.    

IRS will send a letter informing a Taxpayer of being selected for audit and list the information that the Taxpayer is required to send to the IRS.  After receiving the required information requested by a date certain, IRS proceeds to review Taxpayer’s documentation and issues a “Revenue Agent Report” (RAR).  

What if the Taxpayer has a “Disagreement” with the Tax Examiner’s decision?

If after submitting all requested documentation, a Taxpayer disagrees with the RAR, a Taxpayer may:

  • Request an informal conference with the examiner’s manager prior to the date given in the letter,
  • Request an Appeals conference prior to the date given in the letter,
  • Petition Tax Court after receiving a Statutory Notice of Deficiency

Taxpayers have the Right to Retain Representation

Taxpayers have the right to retain an “Authorized Representative” of their choice to represent them in their dealings with the IRS.  An Authorized Representative can be an attorney, a CPA or an enrolled agent who may also attend IRS “in person” meetings on Taxpayer’s behalf.  Taxpayers do not have to attend an interview with the IRS unless IRS formally summons the Taxpayer to appear.

Making sure that Taxpayers choose the right Representative

The American Institute of Certified Public Accountants (AICPA) states that Taxpayers ought to seek favorable outcomes when being represented in front of the IRS by properly analyzing risks and careful planning and strategizing with their Representative.    The AICPA presents eight commonly “violated and/or misinterpreted IRS examination procedures” that are based on the Internal Revenue Manual.   They are:

  1. Initial examination contact letter from the IRS has a short response time:  this can be problematic because failure to respond within the 10-day timeframe may result in a 30-day letter and tax assessment.
  2. Proper written notification of additional tax period(s) under examination is not given.  Consequently, the Taxpayer could be subject to an additional tax liability if IRS fails to provide proper written notification and request documentation for new period(s).  
  3. Items are included in examination report when notification and request for verification was not made.  Leaving a Taxpayer potentially unable to corroborate an item.
  4. Difficulty in rescheduling an audit appointment.  The Internal Revenue Manual provides allowances for the rescheduling of an initial appointment only under specific circumstances.  
  5. Accuracy-related penalties.  Correspondence Examinations will automatically assess an accuracy-related penalty without evaluation of reasonable cause”.  
  6. IRS could request to interview the Taxpayer if the Representative is unable to provide requested information.  IRS could issue a summons to enforce a Taxpayer’s participation.
  7. IRS requests to tour the business and or conduct the audit at the Taxpayer’s place of business but requests an audit location that is inconvenient and/or costly to the Taxpayer and the Representative.  Examinations should take place where the original books, records, and source documents are maintained.
  8. Collectability determination.  Will the IRS consider a Taxpayer’s ability to pay when determining audit scope?   

Don’t be a victim of your own making

Taxpayers ought to consider providing a signed and dated Power of Attorney to a Permitted Representative.  Taxpayers also need to make sure that they are choosing the right Representative; one that will not expose them to “additional scrutiny or liability” due to lack of experience.  The Representative ought to have experience with:

  • providing the information requested by IRS (not more and not less)
  • analyzing examination reports and if necessary, requesting the withdrawal of the report and requesting an Information Document Request
  • determining whether the Taxpayer acted with reasonable cause and in good faith
  • answering IRS questions during an Interview based on client knowledge
  • establishing a working relationship with the IRS

Consult your specialized Tax Representative. All Taxpayers have the Right to a Fair and Just Tax System

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