Taking the Fear Out Of an IRS Audit
May 13, 2016 : Eli Colmenero – The Tax Institute
Getting selected for an IRS audit can cause a rollercoaster of emotions.
Imagine this scenario. You receive a thick letter from the IRS initiating a correspondence audit. Now, you are freaking out because you have 30 days to get your boss to write a letter proving your eligibility for the Child and Dependent Care Credit, or you start scrambling to find receipts for your charitable donations. When you start to think about how much that credit was and how large of a deduction you claimed, you slowly start to see your summer vacation plans dwindle away. But stop! If you educate yourself about your rights during an audit and are proactive in handling the case, you often have nothing to worry about. Here are a few tips.
1. You have a right to representation
You may have an attorney, certified public accountant or enrolled agent assist you or handle the audit on your behalf. In fact, if you sign a power of attorney, your representative may appear without you and may communicate with the IRS independently.
2. Remember to respond timely
If you receive communication from the IRS, don’t procrastinate on your response. For example, after an audit the IRS details its findings in an Examination Report. But this is not final. You can file an appeal within 30 days to seek further review.
If you file a timely appeal of your audit, your case is reviewed by an IRS appeals officer. In appeals, you and your representative may work with a more senior IRS employee with accounting or legal background. This person is also required to weigh the likelihood of success in Tax Court. If you do not reach a settlement with an appeals officer, you are mailed a Notice of Deficiency advising you of your right to seek review by the Tax Court within 90 days.
3. Know what can lead to an IRS examination
Knowing your rights is only half the battle; the rest is following some best practices to avoid an audit.
For example, the IRS is increasing enforcement efforts against improper claims of the Earned Income Tax Credit (EITC). The IRS is checking returns with the Federal Case Registry of child support cases and determinations of custodial parents. If your child lives with you for less than half the year or another parent claims the EITC for the same child, you should probably expect a CP75 notice requesting additional documentation. If you claim the EITC, double-checking the IRS common EITC error page may also prove helpful.
If you receive income, payers usually report the income to the IRS on information reporting forms. If you forget to report any of that income, an underreporter inquiry, called a CP2000 notice, will likely be sent to you that will propose to increase taxes due on your return. Additionally, if you are also reporting mileage or travel expenses, the IRS has a special program that contains average deductions for specific industries and employment positions. If you tend to claim higher deductions for these expenses than your co-workers, there is an increased risk that you may be flagged for an audit.
The last piece of advice for handling an audit is actually quite simple, but it is tempting for some not to take it. Do not ignore an audit—the IRS will remember you and will continue to charge you penalties and interest.
Now that you know you have rights and can get professional assistance, you have no reason to worry. Take a deep breath, determine what tax year is at issue, what documentation is needed, and by when you need it. After that, it is just a matter of proving to the IRS that you are entitled to what you have claimed. Best of luck!