Click on any of the Personal IRS Audit FAQ videos below to get the answer to your question directly from tax attorney William Hartsock, Esq:
Find answers to the most frequently asked questions about IRS audits from a tax attorney with over 25 experience successfully representing clients before the IRS.
How can a tax attorney help me If I am being audited by the IRS?
I understand the tax laws. I understand the procedures you have to go through with the IRS and the tax court. I'm very familiar with that. What I'll do is in order to prepare for the audit, make sure we organize all your documents and put everything into a QuickBooks accounting program and make a good presentation to the IRS.
This tax law firm has two different divisions. Our first division is our accounting and bookkeeping division. When you go through an audit I'll make sure everything is inputted into a QuickBooks type program, make sure that the receipts and all the supporting documentation is all put together so we can make it an excellent presentation to the IRS.
In addition to the accounting and bookkeeping department, we also have the legal department and the legal department is there in order to argue your case. To show under the rights, under the internal revenue code, the regulations and the cases why you're entitled to the deductions and why additional income should not be reported, if that's the case. Those are the biggest benefits in order to having a tax attorney represent you as opposed to representing yourself.
Another thing I generally like to do is I like to use your CPA, your tax preparer, or your enrolled agent, the person who prepared the tax return as your best witness. The witness that can come in and state you did everything right. You deducted the items that you were entitled to. You only took the correct income into account. I want to use them as a witness. You can't use those people as a witness if you have them representing you before the IRS because they then move from an impartial witness that can really help you to an argumentative advocate.
An important thing in deciding who you want to represent you is in the event you're ever charged with a crime for any matter, you would always have an attorney come in and represent you because he's familiar with the case. He can negotiate all those type of things. That's what you want in a representation before the IRS on a tax audit. You need an advocate that can come in and argue your case. That's familiar with the tax law. Familiar with the procedures. Familiar with all those type of things.
Why Was I Selected For an Audit?
The IRS randomly selects 2%-4% of the general population in the low to middle income classes.
The IRS also audits 5%-10% of mid-high income earners, above $60,000 /yr.
In addition, when tax returns are filed, they are evaluated for their conformity with certain norms that the IRS expects to see in similar tax returns. The IRS has developed a set of norms based on audits of samples of randomly selected returns from prior audits. If your tax return does not seem to match up with the tax returns of similar taxpayers, your return might be at higher risk for an audit. Once a tax return is flagged for this reason, it will be reviewed by an experienced auditor. At this level, the auditor can either accept the return as it was filed, or flag certain items for additional review. If the auditor flags certain items for review, the tax return will move on to the examining group which assigns the case to a specific auditor. The auditor reviews the tax return an additional time and decides whether or not to conduct and audit.
Another special audit would be all individuals with foreign bank accounts or foreign assets.
7% of small and midsize corporations get audited, along with all corporations whose gross income exceeds $100 Million.
5% of partnerships get audited.
20% of estates get audited.
1% of trusts get audited.
The IRS takes a look at a discriminate function score, they input every one of the tax returns that are filed. They look at your profession, where you live, what you report for income and expenses, and from those numbers they come up with a discriminate function score. They then take a look at the higher discriminate function score returns, and then take a look at the gross income, the expenses, see if it looks like there's overstated expenses or under reported income, and then they select those for audit.
Generally speaking, if you're a high income tax payer they select more of those for audit. If it looks like you've got ... you're reporting huge losses, those types of things, they'll select those type of returns for audit. There's a lot of ways that you look, what you do is you ask your tax preparer, "Is there anything out of the ordinary," before you file your income tax return.
The second thing is the IRS looks at industries. The IRS will take particular industries, right now they're taking the construction industry and they're looking at those for under reported 1099's for overstated deductions, for contractors that are paying workers in cash, those are the type of things they're looking for right now. The IRS changes over a period of time and they change to different industries.
How does the IRS find unreported cash transactions?
People that don't deal a lot in cash, they generally pull money out of their ATM and they use it for miscellaneous items. That doesn't amount to much. The problem you're running into is when people hoard cash or they're paying a lot of their expenses or business expenses in cash, such as their workers in cash. That creates a real problem because they're avoiding payroll taxes by doing it that way. Everybody that deals in cash thinks that they're the only ones that ever deal with cash. They think that since they're dealing with cash, the IRS will never catch them. That's actually not true. The IRS will be able to do an analysis of the sources and uses of cash analysis to determine how much did they bring in in cash, how much did they pay out in cash and if there's excess cash left over at the end of the year, based on their analysis, they have under reported income.
What Red Flags Can Increase My Chances Of Being Audited By the IRS?
The IRS uses red flags in order to determine which tax returns to audit. Some of the biggest ones is if you are reporting high income. They can generate more of an audit adjustment from them than from the other tax returns, so they audit people with high income. Another thing they do is they take a look at the deductions. If the deductions are so large that they're unreasonable, or out of the ordinary for that type of business, then they'll audit those tax returns.
They also audit large charitable contributions. Another thing that they'll take a look at is businesses that generally deal in cash. Contractors deal a lot of times in cash. They pay their workers in cash. Those are the types of things that they'll audit.
Another red flag is if the IRS knows about a tax preparer that they have a poor reputation, or that they've had audits and they've gone very badly for them, the IRS will audit more of their clients than anybody else. We happen to know who the people with the poor reputation are in the community, but those are the ones that you really want to stay away from.
Is My Tax Preparer Qualified To Represent Me In An Audit?
If you don't have representation, the IRS will see that, and human nature is that they will "walk all over you." You'd do the same if you are in their shoes. It is important that you get competent tax and legal advice, as this area of law encompasses both fields.
I would not have your own tax preparer represent you in an audit as there is a clear conflict of interest between the result that would be in their best interest, and the result that would be in your best interest. Occasionally you need to show there was a lack of communication between you and your tax preparer, getting you out of significant penalties. Often less skilled representatives will want to blame the understatement of income on the taxpayer so that the IRS doesn't believe that the tax preparer did anything wrong. This only cost you money.
The only case where I would not have a tax attorney represent you is when the amounts are so small as it is not cost effective, or that you are certain that all income has been reported and your business expenses are legitimate.
For more information about your situation and whether or not you need legal representation visit our contact us page.
If you have a simple audit, your tax preparer would probably be fine, but if you have a situation that you have a complex audit, or if you've taken aggressive positions on either underreporting income or overstated deductions then that's where you don't want to use that tax preparer. Another thing that's really important is you want to use your tax preparer for what they are best for. You went to them in order to prepare your tax return, and they can be your best witness for you. They can say that you went in there, that were reasonable, that you gave them the expenses, and you did everything that you thought that was necessary in order to get out of penalties, but you can't use your CPA or tax preparer in order to make that argument. You have to use another professional in order to come in and argue the case. Then use your CPA or your tax preparer as the best witness on your side.
In addition, when you hire a tax attorney you get attorney-client privilege that you don't get with CPAs and tax preparers, and that everything you say to your tax attorney is protected by the attorney-client privilege, and every document that is prepared by them is protected by the attorney work product privilege. That doesn't apply to CPAs and tax preparers. Now CPAs and tax preparers have accountant's privilege, and it applies in certain circumstances, but it doesn't apply when you need it the most in a criminal context.
Does the IRS Ever Contact Taxpayers Through Email to Initiate an Audit?
No. The IRS never contacts taxpayers through email in order to initiate an audit. Due to certain disclosure requirements, the IRS will contact the taxpayer to notify regarding selection for an audit solely through mail or telephone. The letter you receive from the IRS will indicate the type of audit the IRS intends to perform, as well as any instructions for you to follow.
For more information, read this article about how you will know if the IRS is auditing you.
What If I Ignore The Audit Notice?
If you ignore the audit notice, the IRS will overestimate the amount you owe, send the Notice of Deficiency to the last address they have on file for you, and assess the tax, penalties and interest without you even knowing it. Then they can collect your assets without your approval. Although this appears to violate the Due Process Clause, the courts have continuously upheld this technique.
If you ignore the audit notice, the IRS will finish the audit without you. What they'll do is they'll just look at your tax return. They'll disallow your deductions. Send a 30 day letter to you. If you don't respond to the 30 day letter, then they'll send a Notice of Deficiency, which you have 90 days to respond to. If you don't respond within the 90 days by filing a petition in Tax Court, then the IRS will assess the tax against you. The assessment is the legal obligation to pay. You will owe the money, even though you didn't appear in the audit or the appeal process.
Does Filing an Amended Return Affect the Return Selection Process?
No, filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screening process just as initial returns do, and the amended return may be selected for audit. In general, if you explain the reason for the amended return and back up your return with any required documentation, the IRS will simply process your amended return without initiating an audit.
Where Will the Audit be Held?
The location of the audit depends on the type of audit being conducted. A correspondence audit is conducted entirely via mail, so there is little to no in-person interaction with the IRS auditors. In an office audit, the taxpayer whose tax return is being audited must report to the local IRS audit for an in-person meeting with the auditor. A field audit involves in-person interview and examination of records at the taxpayer’s home or place of business. For more information, read these articles about Office Audits, Correspondence Audits and Field Audits
It's your choice as to where the audit is to be held. Generally, it's going to be held where the taxpayer resides. If you've got two or three homes, then you can make a decision at that point what area you want to have the audit held in. It should be convenience to you. It's not necessarily convenient to your tax preparer or your power of attorney. It's convenient to where you are living. If you want to get it moved, you can, but you generally have to be residing in that other area as well.