April 2019 JD Supra
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What if the IRS wants to “Audit” your Tax Returns? was published by JD Supra on 4/10/19.

The IRS might want to audit (also known as a review or an examination) an Individual Taxpayer’s accounts and financial information to verify that the information that the Individual Taxpayer is reporting is compliant with the tax laws and that the reported amount of tax is accurate.  An audit does not necessarily mean or suggest that a Taxpayer has a problem or that there is an accusation of wrongdoing.

The IRS uses several different methods to select Taxpayer returns for an Audit

  • Random selection and computer screening:  Selection is based on a statistical formula. The Taxpayer’s tax return is compared against IRS “norms” for similar returns. IRS has developed “norms” from audits of a statistically valid random sample of returns, as part of its “National Research Program”.   
  • Related examinations:  IRS may select Taxpayer returns when they involve issues or transactions with other Taxpayers, such as business partners or investors, whose returns were selected for audit.

What is the IRS National Research Program (NRP)?

NRP is a comprehensive effort by the IRS to measure compliance for different types of taxes and various sets of Taxpayers. NRP will provide a statistically valid representation of the compliance characteristics of Taxpayers. Types of voluntary compliance include filing compliance, payment compliance and reporting compliance. Payment and filing compliance data are generated annually.

  • The measure of filing compliance is the percent of reported tax on timely filed returns that are timely filed. The IRS measures filing compliance by comparing known filers (using IRS records) with expected filers using U.S. Census Bureau current population surveys. IRS receives no Taxpayer specific data from the U.S. Census Bureau.
  • The measure of payment compliance is the percent of reported tax on timely filed returns that are timely paid.  It is generated annually. NRP measures payment by analyzing IRS Master Files for timely payment of taxes.
  • The measure of reporting compliance is the percent of true tax liability that is correctly reported on timely filed returns.

Audits come in different forms  

If the IRS wants to audit your tax returns, IRS will ALWAYS inform a Taxpayer of an audit by letter (no phone calls or emails).  The first kind of audit is known as a correspondence audit. This type of audit usually comes about due to the making minor mistakes (example would be attaching a Schedule to the Tax Return) and requires the Taxpayer to mail information to IRS.  Once the information is mailed to IRS, if it is satisfied, the case will be closed. The second kind of audit is known as an office audit. In this case, a Taxpayer is required to bring the tax related information to an IRS office for review. As an example, this type of audit can arise out of a high medical expense deduction, and IRS would want to see the cancelled checks and the medical bills.  The third kind of audit is the field audit. In this case, the IRS agent will visit either the Taxpayer’s home or place of business to double-check the accuracy of a Taxpayer’s tax return(s).   

Good record-keeping can save a Taxpayer

During civil audits, Taxpayers bear the burden of proof of their responsibility to substantiate entries, deductions, and statements made on their tax returns.

Good record keeping can help a Taxpayer monitor the progress of a business, prepare financial statements, identify sources of income, keep track of deductible expenses, prepare tax returns, and support items reported on tax returns.

Taxpayer have rights during an Audit

  • Right to be Informed
  • Right to Quality Service
  • Right to pay no more than the Correct Amount of Tax
  • Right to Challenge the IRS’s position and be Heard
  • Right to Appeal an IRS’s decision in an Independent Forum
  • Right to Finality
  • Right to Privacy
  • Right to Confidentiality
  • Right to Retain Representation
  • Right to a Fair and Just system

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

If after submitting all requested documentation from the IRS, a Taxpayer disagrees with the Revenue Agent Report, 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

What if a Taxpayer agrees with audit findings?

If the Taxpayer agrees with the audit findings, the Taxpayer will be asked to sign the examination report or a similar form depending upon the type of audit conducted.

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.

Some Audit Survival Tips:

  • If you are not ready and do not have time to gather all your records, request a postponement.  
  • Meet with your Authorized Representative to discuss strategies.  If you have an Authorized Representative, the Authorized Representative should answer the IRS Agent’s questions.
  • Be prepared, so that the meeting does not result in a more-in-depth audit.
  • Make sure that the Auditor is contacted if you are not in agreement with the examination report.
  • Try to reach a compromise if you don’t agree with the tax liability.  
  • Make sure that you are aware of all your Rights as a Taxpayer.
  • Be truthful.

Don’t be a victim of your own making – Choose the Right Tax Representative

Taxpayers need to make sure that they are choosing the right Tax Representative; one that will not expose them to “additional scrutiny or liability” due to lack of experience.  The Tax 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 if the IRS wants to audit your tax returns. All Taxpayers have the Right to a Fair and Just Tax System