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IRS Audits Tips
IRS Audit Statute of Limitations
The IRS’ statute of limitations timeframe regarding starting an audit depends on a couple of factors. Both involve whether you file a tax return or not. First, did you file a return? Secondly, did you not file a return?
If you did file a return, the IRS has three years from the original date of your tax return filing to start an audit. That means that within that time period, you should have been notified of any pending IRS examinations along with any explanation for the needed examination (audit).
If the IRS cannot complete their audit within three years, you may be requested to sign IRS Form 872. This will extend the time for assessing the tax.
If you did not file a return, however, there is no statute of limitations timeframe for the IRS to start or complete an audit on you. There also is no timeframe limit for assessing and collecting any taxes due from you. In other words, if you do not file a tax return, the IRS can come after you 10 years after the date you were supposed to have filed a tax return.
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Audit Representation
DebtHelp.com Tip: Whenever you are involved in an audit, you have the option of representing yourself, have someone else accompany you, or have someone represent you in your absence.
Yourself. If you are confident in your tax knowledge abilities, and are involved with a basic return, this method may be your best choice. Be certain you are current with your IRS tax laws, though. Be prepared for any items the IRS may question you on. Be prepared, also, to explain your treatment of any item in question.
Accompany. IRS Form 8821 (Tax Information Authorization) names a representative for you. You are only authorizing this person, your representative, to receive information for you. He or she cannot fully represent you at the audit since they cannot take any action on the information they receive. You may still want to have this person along at an audit, though.
Actual representation. You will fill out and file IRS Form 2848 (Power of Attorney) when you want to have someone else fully represent you at the IRS audit examination. You do not have to be present. Here, you name your rep. The rep is fully authorized to represent you and take any action necessary. This includes signing an agreement for a deficiency or over assessment of tax to conclude the case. An example of individuals having the power of attorney includes CPAs, enrolled agents, and tax attorneys. These individuals must be allowed to practice before the IRS.
You may want to have actual representation when you are too emotionally involved in the audit to provide competent self-presentation, when you are uncertain as to handling other issues that may arise, the tax law is too complicated or you do not fully understand it, and highly technical supporting information may be required.
Also, the IRS will stop and reschedule an audit when you request a consultation with your representation (CPA, attorney, or Enrolled Agent).
By hiring actual representation during an IRS audit and giving someone the power of attorney, you can save yourself from a potential IRS problem. This is especially true if the applicable tax laws are beyond your comprehension level.
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Types of IRS Audits
After it has been determined that your tax return is going to be examined further, audited, by the IRS they can choose to have the examination conducted either through the mail or in-person via a personal interview.
Correspondence audit. The IRS audit conducted through the mail is known as a correspondence audit. Its scope is less than that required for an office audit. The IRS will first send you a letter notifying you that they need more information from you. Or, the letter may contain a reason for why they believe a change to your tax return may be needed.
Upon receiving this letter, you may respond by mail or request an in-person meeting. After this step, the IRS will review your information and/or explanation and then make a determination.
You will receive an explanation of the reasoning behind the determination. You are allowed to appeal this decision through the Office of Appeals.
In-Person/personal interview. Also known as an office audit, this IRS audit is more time-consuming and involved than the correspondence audit. The IRS examiner can question other areas not originally covered in the correspondence audit, for instance.
The in-person audit will normally be at the IRS branch office closest to where you live or operate your business.
Or, the IRS audit interview could be at your place of business, office, or home.
You have the right to ask that the interview take place at a reasonable time and place that is convenient to both you and the IRS.
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Audit Flags
DebtHelp.com Tip: There are a variety of areas involved on tax returns where the IRS may scrutinize more closely. These areas are known for incorrect tax reporting and possible abuses. In technical terms, they are known as IRS red flags. Here are some areas you need to concern yourself about to avoid receiving any IRS red flags:
Home business office. Many taxpayers claim this deduction but do not meet the criteria guidelines. This area involves many IRS rules and regulations that must be followed in order to qualify for this tax deduction. Know the IRS laws prior to making any claim. The IRS will especially take notice if you operate a home business with little income, while you are claiming many expenses related to it.
Questionable business deductions. Whenever your tax return contains business deductions that appear unreasonable or do not relate to anything else on your tax return, the IRS will notice.
Your business deductions are much larger than your business income.
History. If you have a history of IRS audits, your tax return will be scrutinized more closely by the IRS.
Tax-shelter losses. This is a heightened area of scrutiny with the IRS. Your tax return will stand out.
Itemized deductions. Whenever your itemized deductions (especially involving medical, taxes, and interest) are beyond the acceptable IRS limit, your tax return will stand out.
Earned income credit. This area has received abuse and is now being more closely scrutinized by the IRS.
File separately. If you are married, yet file separately from your spouse, this can increase the chance of having inconsistent information between the two tax returns that you file.
Shareholder. By being a shareholder of a corporation that has been audited by the IRS, your tax return will be monitored more closely.
Charitable contributions. Whenever you are claiming charitable contributions, your income will be taken into consideration. If you are claiming a deduction for more donations than what it appears your income level warrants, the IRS will question that.
No explanation. Whenever you are reporting transactions (business or personal) that are ‘out of the ordinary’, you need to send along an explanation of why you are treating the item the way you are. If you do not send this explanation, the IRS will question it.
Cash. The IRS will scrutinize more closely why you are receiving large sums of cash from your business transactions.
Underreported income. The IRS will monitor you when they notice you have an excessive amount of underreported income on your tax return. Information they receive from third parties does not match the information you report on your tax return. This will set off a “red flag”.
Tax preparer. If your tax preparer is on the IRS list of “suspectible tax preparers”, your tax return will stand out. This individual has a history of violating the IRS tax laws and is known as a problem preparer.
Informant. Also, if a third party informant has contacted the IRS about knowing you have received income and not reported it, the IRS will stand up and take notice. They will research this area prior to be certain of its legitimacy prior to contacting you, however.
Even though only a small amount of tax returns are audited each year (it is estimated to be about 1%), it is important to know and understand the above-mentioned heightened areas of scrutiny.
Many taxpayers have an IRS tax problem due to the fact that they under-report income on their tax return. They have received income from sources that did not send them a 1099, for example. Even though you have not received a Form 1099 (the form used to report this income), the third party has sent the information to the
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High Risk Trigger Areas
The IRS has noticed recently that there are certain industries (areas) which are known for abuse of the tax laws. Therefore, the efforts to scrutinize these tax areas have been increased. These areas are known as high risk (non-compliance) audit trigger areas.
If you file a tax return, and are involved in any of the following categories, be on your guard for a possible audit.
Schedule C (sole proprietors) filers. This is perhaps the largest scrutinized area regarding IRS tax returns. A recent study by the IRS found that Schedule C filers are known for not reporting income. Also, there are many chances to claim incorrect deductions in this category.
Partnerships S-Corporations Abuse tax shelters. This is an illegal activity that has shown recent growth.
Corporations – in general. Corporations are known for tax loopholes. More recently, shareholder fraud has become too popular.
High-income individuals, non-filers. Taxpayers with more money can, naturally, find creative ways to move it around.
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Preparing For Your IRS Audit
Once you find out that you are going to have an IRS audit, there are some things you need to do to properly prepare yourself. Here are some suggestions.
Review your tax return in question. Review and recall what you recorded and why.
Possible weak areas. If someone else prepared your tax return, go over with them any areas that might cause a weakness in your position.
Find supporting documentation. For any amounts listed on your tax return, gather together all the applicable documents. You may need to provide these as evidence.
Specific items. Find any documentation on items the IRS is specifically questioning. Know how and why you arrived at the figure that you did.
Review the tax laws. If any area is pinpointed by the IRS in its notice, study that tax law area to become better informed. That way, you will prepare yourself for any questions. You will also need to let the IRS know why you treated an item the way you did.
Contact your power of attorney, if needed. See if they are available on the audit date. If not, question them about any items listed on your tax return. By having someone available to answer technical questions, you can only benefit.
Documents. Do not take any more information with you to the IRS audit examination than they (IRS) originally asked for.
Tight lips. Do not volunteer (or mention) any additional information to the IRS. The more you say, the more they can question.
Fraud. Contact your attorney if you think your tax return may be fraudulent. They can provide insight and background information in the intricacies of your tax return.
Make certain that the audit date is far enough in advance for you to properly prepare yourself.
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Tax Audit Protection
You can help protect yourself from an IRS tax audit by following these simple suggestions:
Maintain good records. If you are ever called in for an IRS audit, you will need to have good records. If you do not, you can be assessed a penalty. A poor record keeping system can signify willful neglect.
Hire a professional. If you are not tax knowledgeable, hire someone who is. A trained tax professional can help you with your tax situation. Perform a background check prior to hiring.
Obtain IRS Publications. Whenever an IRS tax area affects you, obtain the applicable IRS Publication. They make good reference tools throughout the year. Even if you totally do not understand them, they do provide a foundation of useful information.
Respond promptly to any IRS communication. By doing this, you will protect yourself from further IRS questioning and possibly audit.
Respond honestly with IRS. Answering questions completely and honestly when communicating with the IRS is essential to your success.
Take advice. Even if you are not completely knowledgeable about tax laws, take your tax professional’s advice.
Know tax implications. By knowing the tax implications of any purchases, you can help avoid audits.
Meet deadlines. Meet the tax filing deadlines. Do not file late. Do not have your tax return stand out if you want to avoid the possibility of an audit.
Paying on time. Pay your taxes on time. Same reasoning as above applies.
Follow guidelines. Follow the IRS guidelines regarding applicable areas. For instance, if you have a home business, know the intricacies of that area before you claim it on your tax return.
Double check. Double check your tax return prior to filing it. Make certain everything is correctly filled out. Make certain you have not included too many zeros, for instance. Make certain there is something on each applicable line.
High risk areas. If you are involved in an audit high-risk area, make certain all of your information is correct. Even though you may be involved in an area known as high risk, not everyone is unscrupulous. Prove that you are not. Have someone else go over it.
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IRS Taxpayer Bill of Rights
Sometimes, when finding out about the possibility of an IRS audit, taxpayers have a tendency to become nervous and upset. Even though the prospect of facing an IRS audit can be rather unnerving, you need to know that you are protected by the Taxpayer Bill of Rights.
The Taxpayer Bill of Rights was developed after the IRS had been getting a reputation for being unscrupulous and unyielding to taxpayers, especially during audits. It is meant to protect taxpayers from any mistreatment from IRS personnel.
Sections included in the Taxpayer Bill of Rights include:
Protection of your rights. The IRS employee is expected to explain and protect your taxpayer rights throughout any contact with the IRS.
Payment of correct tax. You are expected to pay only the amount of tax due. If you cannot, installment plans are available.
Representation. During contact with the IRS, you can represent yourself, or have someone represent you in your absence. That person, however, must be able to practice their profession in front of the IRS.
If you ask for a consultation during an interview, the IRS needs to reschedule the interview – usually.
Professional and courteous service. You deserve to be treated professionally and courteously. If not, report your IRS employee to their supervisor. If that is not satisfactory, write to IRS director in your area’s IRS branch office.
Privacy and confidentiality. Except as authorized by law, the IRS cannot disclose any of your information.
Unresolved tax problems. If you cannot resolve a tax issue through the ‘normal’ channels, you can receive help from the Taxpayer Advocate Service.
Appeals and judicial review. You have the option of filing for an appeal if you are not happy with the IRS audit decision.
Penalty relief. The IRS will waive and penalties and interest on your account that was caused by you taking incorrect advice from an IRS employee.
