The notice from the IRS that your tax return is being audited is a frightening experience for most people. Do not panic, it is not quite the end of the world, but it is very serious. The first thing to remember is this: “He who defends himself has a fool for a client.” Do NOT try to represent and defend yourself. You will lose.
Important rules to remember:
- You do not have to appear at the audit. You can send a hired professional tax expert to represent you as your power of attorney. That representative can be a CPA, Enrolled Agent, or a lawyer.
- You have the right to remain silent if you ever deal with an IRS employee, whether in person, on the phone, or by mail.
- Just because the IRS asks for something does not mean that you have to give it to them.
- What an IRS employee says or thinks is not law.
- Auditors are not law enforcement officials. They do not have badges, guns, nor do they have arrest powers.
We've been dealing with the IRS for more than 25 years. We know what the IRS can — and cannot — do, and we understand your rights under the law.
Professional IRS Tax Audit Assistance
IRS auditors (“tax examiners” and “revenue agents”) are trained to detect and sniff out overstated or erroneous deductions and/or income that was not reported on the tax return. Revenue Agents also undergo “psychological” interview techniques training and learn how to word questions, use non-threatening body language, and read your behavior to detect nervousness or deception. This is similar to training that police detectives receive, although auditors are not law enforcement officers. What may seem like an innocent question from the auditor can be devastating to you if you don’t know the auditor’s motives and goals and where they are headed with a particular line of questioning. In short, if you don’t understand tax law, you had better not ever talk to an auditor. You don’t have to worry about this as long as you never communicate with the IRS, in person, by phone, or by mail. REMAIN SILENT. Do NOT go to their office for any reason.
Most audits begin simply as a verification process. They want you to prove, with documentation, that your deductions are correct and legal. They may ask you for receipts from charitable organizations and/or canceled checks to verify the charitable contributions that you deducted on Schedule A. The same is true for medical expense deductions, property tax, and mortgage interest.
Self-Employment Tax Audits
If you are self-employed (you are self–employed if you receive 1099 forms for non-employee compensation), you can expect a thorough investigation into the business expenses that you deducted. The same is true if you own a business that is an LLC, partnership, or corporation. The auditor will want to see receipts, credit card statements, bank statements, canceled checks, to prove that you spent the money you said you spent on legitimate business expenses. Remember that business expenses must be “ordinary and reasonable” and directly relate to the production of income from that business. They want to verify that you did indeed spend the money on what you said you spent it on. Plus, they want to ensure that the expenditure qualifies as a legitimate business expense under federal tax law.
We've been dealing with IRS Tax Audits for more than 25 years. We know what IRS Auditors can — and cannot — do, and we understand your rights under the law.
Tax Audit Income Reporting
The auditor will also be looking at the income side of the equation and the expenses deducted. The first thing they will do with bank statements is add up the total deposits for the year and compare that number with the gross income you have reported. If your deposits far exceed the amount of income reported, they will ask why? You must be prepared with an explanation for each deposit that you did not count as income. You must tell where the money came from if you are claiming it is not taxable income, and you may have to produce some form of documentation to prove it. For example, borrowed money (debt proceeds) is not taxable. If you deposited money that you borrowed, then you would want to produce a copy of the loan agreement to prove that it was borrowed money. If it was a gift of a significant amount of money from your parents, then you might want a letter from your parent’s stating this as well as a copy of the canceled check that you parents wrote to you. If you inherited money during the tax year you will want to provide any documentation that you received from the estate that says you inherited that money, perhaps a copy of the will as well.
Of course, you don’t have to worry about this if you hire a tax expert to represent you. They will know what to take to the IRS audit meeting and will have already gathered all the answers to anticipated questions from the auditor and you will already have provided your representative with all the necessary documents well before the actual audit ever takes place.
All tax accountants are not the same
“Enrolled Agent” is a top credential tax practitioner recognized by the IRS as well as all 50 states. Our status as Enrolled Agents, as well as our in-depth knowledge of the tax code, tax law and tax court rulings, helps us achieve better outcomes for taxpayers facing various kinds of tax problems.
We deal with the IRS frequently. Let us help you.
ROBERT M. SWAIM, MAcc.
Enrolled Agent & Tax Accountant