First, deal with the problem immediately. Don’t let the
By GARY MILLER | email@example.com | GEM Strategy Management
Last year I wrote an article on eight tips for avoiding an IRS audit. This year, I
want to give you some advice on what to do if you receive an IRS audit notice.
First, deal with the problem immediately. Don’t let the problem fester. Too often
business owners do not open IRS letters or fail to pick up IRS certified letters.
Worse yet, some owners ignore automated IRS phone calls or calls from a revenue
officer. Ignoring the IRS greatly increasing the chances that the government will
resort to collection actions (liens, wage garnishments, levies, seizures) in order to
force taxpayer compliance.
Second, understand what the IRS wants. You have been selected to be audited for a
specific reason. Being audited doesn’t mean you have done anything wrong. Your
circumstances may be atypical. Your business may be cash intensive or you may
have an unusual deduction that the IRS wants to review in more detail.
The most important explanation of what the IRS is looking for is contained in the
Information Document Request (IDR). You will receive the IDR when you are
initially contacted by the IRS. By understanding what the IRS is looking for, you
can prepare and organize your documents, providing the most complete
substantiation possible. The more complete your substantiation is, the less likely
the IRS is going to challenge the information stated on your return.
Third, decide on professional representation or self-representation. If you are wellorganized
and have nothing to hide, there is nothing wrong with representing
yourself in an audit. However, if you have a complex return, failed to report
income, overstated expenses, failed to keep accurate records or reached an impasse
with the auditor, then you should seek professional help.
Since your ultimate goal is to secure the smallest final bill or to obtain a “nochange,”
on your tax return, hiring a tax attorney or a CPA firm to represent you
has significant advantages.
Often tax attorneys and CPA firms have good working relationships with the IRS.
They are knowledgeable about the IRS audit procedures, know the right time to
elevate an issue to appeals and can often move through the audit process quicker
than a taxpayer can alone.
An advantage to engaging a tax attorney is the attorney-client privilege, which
offers a greater level of protection than a CPA. In cases where wrongdoing has
occurred, a tax attorney is essential.
Fourth, limit the scope of the audit. Typically, the IRS has three years to request
examination of a return. They will normally start auditing within one year. The
exceptions are cases of late/no filings, significant errors or omissions in reporting
income or expenses, and fraud. Do not offer up previous tax returns as it might
trigger the opening of up other tax years, or an examination change. The IRS has
the right to make adjustments on additional tax years even though it wasn’t
covered with the initial IDR.
Fifth, control the flow of information. If you are representing yourself, you have
the distinct disadvantage of having to answer the auditor’s questions immediately
when asked. Never lie or make material misstatements to the auditor. Doing so is a
federal crime that carries possible jail time. However, during an audit, make every
effort to control the flow of information. Carefully listen to each question the
auditor asks and answer only that question. Be brief. Keep your answers short.
Answer as follows: “Yes”, “No”, “I don’t know”. “I will have to research
that.” Too much “off’-the-cuff” information gives the auditor more ammunition to
make examination changes and potential additional assessments.
Sixth, remain personable and cooperative. Often, it is difficult for many taxpayers
to keep their emotions in check during an audit. Many feel afraid, angry and
inconvenienced and resent the costs of the audit. It is true that some auditors can be
very difficult. However, the best audit outcomes are gained by working with the
auditor rather than butting heads with him or her. Auditors are human, too. They
will often favor those taxpayers who are personable and genuinely trying to work
with them. Being well prepared and organized demonstrates sincerity to resolving
tax issues. Cooperate. Do everything you can to move the audit process along
Seventh, pick your battles. Tax attorneys and CPAs tell me that they try to handle
audits from a big-picture perspective. It doesn’t make sense to fight tooth and nail
for every little deduction when it may lead the auditor to open up returns from
other years. You may lengthen the audit and you will surely jeopardize your
working relationship with the auditor. Conceding deductions in some areas or only
taking a percentage of the claimed deduction when you do not have adequate
receipts or records may ultimately be the best strategy. Auditors tend to respond
positively when taxpayers are reasonable with them. Small concessions may lead
the auditor to be more lenient in other areas. Keep focused on the big picture goal –
minimizing your tax obligation.
Gary Miller is CEO of GEM Strategy Management Inc., which advises middlemarket
private business owners how to prepare to raise capital, sell their
businesses or buy companies. 970.390.4441 gemstrategymanagement.com