November 2021 Foodman website and JD Supra
IRS Audit

Rule #1: Don’t Panic!

Under the Biden Administration’s proposed American Families Tax Plan, there is the possibility of more tax audits, but only for a certain groups of high income people. That’s because more information would be reported to the IRS.

The proposed Biden Plan could increase that substantially because the IRS would be receiving more information. Under the Plan, foreign and domestic financial institutions, crypto-asset exchanges and custodial institutions must report all gross inflows and outflows on personal and business accounts.

Crypto exchanges would report with 1099s, as brokerage houses already do. Inflows and outflows on bank accounts would take the form of an additional report to the treasury.

How likely are you to be audited?

While IRS audits are among taxpayers’ greatest fears, only about one percent of Americans with incomes below one million dollars were audited in 2019. The odds increase as your income goes up – especially if you have business income.

What if you’re selected for an IRS audit?

An IRS Audit is what is known as an impartial review to assess return filing accuracy. The IRS audits returns to determine if income, expenses, and/or credits are being reported accurately. 

Generally, the IRS has three years to audit tax returns. Returns filed in the past two to three years get the most attention.  If it finds a significant understatement of income, it could look back at up to six years.

Can you just ignore an IRS audit request?

No! Ignoring an IRS audit notice can result in an assessment of additional tax, plus substantial penalties, and interest. If you continue to ignore subsequent IRS notices, you may lose your right to dispute the case in Tax Court, and the IRS can begin trying to collect the tax. They also can extend the period under audit to examine additional years.

An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property

Rule Number One: Don’t panic!  There is a process.

An audit does not necessarily mean that a taxpayer tax return was inaccurate. It’s usually the result of statistical sampling.

The IRS audits Individual taxpayer’s accounts and financial information to verify that the information reported is accurate and complies with the tax laws. 

You will ALWAYS be informed of an audit by certified letter – never with phone calls or emails.

Three types of audits 

  1. Correspondence Audit. This usually results from minor mistakes. For example, not attaching a Schedule to the tax return. This requires you to mail information to the IRS. If the information satisfies the IRS, the case will be closed. 
  2. Office Audit. In this case, you are 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. The IRS auditor would want to see the cancelled checks and the medical bills. 
  3. Field Audit. In this case, the IRS agent will visit either your home or place of business to double-check the accuracy of your tax returns.     

You are allowed to have representation

In all cases, you can be represented by a licensed CPA, an attorney or an Enrolled Agent.

Be sure your representative has experience:

  • providing exactly the information requested by IRS: not more and not less
  • analyzing examination reports
  • if necessary, requesting the withdrawal of the report and seeking an Information Document Request
  • determining whether you acted with reasonable cause and in good faith
  • answering IRS questions during an interview with knowledge of your situation
  • establishing a working relationship with the IRS

How long do IRS audits take?

The IRS usually starts these audits within a year after you file the return, and wraps them up within three to six months. But expect a delay if you don’t provide complete information or if the auditor finds issues and wants to expand the audit into other areas or years.

Some Audit Survival tips:

Arm yourself with information. Gathering and organizing your information is essential for understanding the process; understand why you were chosen to be audited; know what your responsibilities and rights are and know how to appeal IRS findings.

  • If you can’t provide receipts, you have to recreate a history of your business expenses.
  • If you are not ready and do not have time to gather all your records, request a postponement. 
  • Meet with your Representatives to discuss strategies.  If you have a Representative, the Representative should answer the 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.
  • Don’t Lie/Be Truthful