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What Does the IRS Audit Process Look Like?

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Key Takeaways

  • Topic: What Does the IRS Audit Process Look Like?
  • Generally the IRS audit process starts with an information document request.
  • The auditor requests information surrounding their examination of whatever tax return is under audit.

Generally the IRS audit process starts with an information document request. The auditor requests information surrounding their examination of whatever tax return is under audit . The taxpayer will then gather that information and will meet with the auditor to go over the results of that information. A lot of times by looking at the auditor’s document request you can tell why the return got audited. Most audits will focus either on the income side of things or on the deduction side of things. Occasionally they will focus on both. In any event the taxpayer will sit down, then will meet with the auditor or they’ll have the representative meet with the auditor and the auditor will go through the substantiation with the taxpayer and/or their representatives. At the end of the review of the substantiation, the auditor will make adjustments based on things that they feel are they are owing to the government and they will prepare a report and present it to the taxpayer. If the taxpayer agrees with the report then the audit is over. If the taxpayer or the representative disagree with the report they see may submit additional documentation and/or work to clarify things in the audit report. If the auditor and the taxpayer ultimately cannot agree, then the case goes to Appeals where the taxpayer can further challenge the audit. That’s how the IRS audit process works.

What Are IRS Auditors Looking for When They Audit a Return?

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VideoBG23

Key Takeaways

  • Topic: What Are IRS Auditors Looking for When They Audit a Return?
  • What are our s Auditors Looking for When they Auto to Return? IRS auditors essentially are looking for mistakes.

What are our s Auditors Looking for When they Auto to Return? IRS auditors essentially are looking for mistakes. The IRS is comparing the return that was filed versus the substantiation that you’re providing and matching it to see if there’s any additional tax due and owing specifically there are a few things that probably triggered the audit, so the auditor is going to be looking for specific issues on the return what issues those are is a hard thing to say but it depends on everybody’s individual facts and circumstances for example a taxpayer may have earned a certain level of income over two years and that has a significant reduction in income in the third year the IRS we may want to know “why the taxpayer had such a significant reduction in income” but essentially the auditor is going through and looking for errors and looking for adjustments that they can make in order to get additional tax to the government if those errors start to add up or the taxpayer is unable to substantiate the deductions and the income that they took on the return then the IRS auditor will is issue penalties in connection with that I’d like to believe that most auditors go into the process with good faith and my experience has been more positive than not in this arena there, but the IRS is like any other organization there are good people within that organization and there are bad people within that organization but ultimately the auditor is going to do their job good or bad they’re going to go through the audit they’re gonna find the mistakes and they’re gonna assess how much tax they think is due and the best thing that you can do to mitigate it is to build a plan to prepare for that and to make your presentation as mistake-free as possible so that you can get through the other.

How Long Does an IRS Audit Usually Take?

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Key Takeaways

  • Topic: How Long Does an IRS Audit Usually Take?
  • Well that can be a difficult question to answer and it’s dependent on a lot to do with the taxpayer’s factual circumstances.
  • Some taxpayers are bigger, some are more complicated and some have a lot more to go through.

Well that can be a difficult question to answer and it’s dependent on a lot to do with the taxpayer’s factual circumstances. Some taxpayers are bigger, some are more complicated and some have a lot more to go through. Generally speaking, the IRS audit process shouldn’t take all that long if you gather your information. If you could substantiate the items that are on the return in that meeting, the audit should be over with. Audits that take longer than a few months are a red flag for me and the reason for this is it’s a sign that the auditor is engaging in a fishing expedition. You should come in with a clear plan of the audit, you should present your material and if you do so clearly and cognizantly, there shouldn’t be any issue for the auditor. Here’s my return, here’s my substantiation, now go home. It really should be as easy as that. The problem is that most taxpayers that get audited have some sort of adjustment that the IRS is seeking to make. So the important thing is understanding where your particular pain point is, addressing that pain point as much as possible and then moving on quickly. The longer the audit remains open, the more documentation that’s provided to the auditor, the greater the risk. So audits that go longer than four or five months are generally a negative sign to the taxpayer and need to be dealt with quicker.

What Type of Documentation Will I Need in My IRS Audit?

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Often the documentation that the IRS is looking for in your audit will fall into two categories: income side documentation and expense. A review of the IDR that the auditor provided will give you an idea what the focus of the audit is going to be on the income side. The IRS is going to ask you for bank statements and for supporting accounting if applicable that would tend to corroborate the amount of income that you claimed on your return. You can expect to produce a profit and loss if you’re a business, you can expect to produce a general ledger and the IRS will also want to see any credit card or any other financial account statements that would tend to corroborate your income. On the expense side they’re going to be looking for proof of deductions. So what that means is they’re usually looking for receipts, invoices and other documentation that would tend to corroborate your expenses although you can be dinged for missing invoices.

Key Takeaways

  • Topic: What Type of Documentation Will I Need in My IRS Audit?
  • Often the documentation that the IRS is looking for in your audit will fall into two categories: income side documentation and expense.
  • A review of the IDR that the auditor provided will give you an idea what the focus of the audit is going to be on the income side.

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Do I Have to Provide All the Documentation the Auditor Is Requesting?

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Key Takeaways

  • Do I have to provide all the documentation that the auditor is requesting?
  • The point is, is even with this backstop and even with the broad power that they’re given, IRS auditors are under some limitations.

Do I have to provide all the documentation that the auditor is requesting? Yes and no. If the IRS wants to, the IRS auditor has broad authority to get whatever documentation they need in connection with the audit. If you refuse to provide the documentation, the auditor can issue a summons and you can end up in district court, which is the last place you want to be in an audit.

But the reality of the situation is, the IRS auditor has limited resources. You’re one of many cases that the IRS auditor has open, and the auditor has only a certain amount of hours in the day, just like we all do. So the auditor is forced to pick and choose where they want their fights to be. Now, the auditor is going to need all the documentation that they need to complete the audit. But in the course of the process, you can negotiate with the auditor in an effort to trim down the IDR or focus on the issues that are really important. The auditor wants to see receipts for $5 ,000 worth of expenses. Maybe you can talk them into thinking that that’s immaterial and requesting only larger expense categories as a method of verifying the expenses on the return.

The point is, is even with this backstop and even with the broad power that they’re given, IRS auditors are under some limitations. So if you’re strategic about it, you can limit the scope of their investigation, move them through the process quickly, and get the audit over with as soon as possible.

What Do I Do If There Is a Serious Error on My Tax Returns and I Get Audited?

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Key Takeaways

  • Topic: What Do I Do If There Is a Serious Error on My Tax Returns and I Get Audited?
  • So the first thing you need to do if there’s a serious error on your return is to understand what your risk is.
  • Was the error caused willfully? Was it not caused willfully? This is not the time to be an advocate.

So the first thing you need to do if there’s a serious error on your return is to understand what your risk is. Was the error caused willfully? Was it not caused willfully? This is not the time to be an advocate. You need to answer yourself honestly because it’s always important to understand where the truth is in order to find out what your position is and the position you’re going to take in negotiating with the Auditor. If the error was a simple mistake and there’s no criminal liability, then the decision needs to be made on whether or not you’re going to disclose that to the auditor. If you don’t disclose it to the auditor and the auditor catches it later, there could be consequences in the terms of penalties however if you get out in front of the issue and disclose it, although you’re on the hook for whatever the taxable adjustment is as a result of the error, you may be able to leverage it to your advantage. For example, if you can cause the auditor to divert their attention to the error you may be able to cover up smaller errors and ultimately reduce the tax liability that you would have owed depending on what the error is. Depending on where it is, you need to measure the strategy carefully. That’s why we recommend that clients go through the planning and pre-audit process so that we know how these things are going to play out in the audit and we can determine what the best way to play the error. If you have a serious error on the return and you don’t hire a representative, it’s really important that you really think about doing so. Having a serious error can subject you to lots of penalties, some as high as 75% for civil fraud, so it’s important that you talk to a knowledgeable tax attorney to get a fair opinion on what your risk is. Serious errors are no laughing matter. It’s important that you deal with it honestly and appropriately before the IRS makes a decision.

Can I Go to Jail for Errors on My Income Tax Returns?

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Key Takeaways

  • Topic: Can I Go to Jail for Errors on My Income Tax Returns?
  • Yes you can! With the caveat stated that most people do not go to jail because of errors on the return, criminal prosecutions take willfulness.
  • There has to be some deliberate action on your part to mess up the return or to conceal income or hide expenses in some way.

Yes you can! With the caveat stated that most people do not go to jail because of errors on the return, criminal prosecutions take willfulness. There has to be some deliberate action on your part to mess up the return or to conceal income or hide expenses in some way. If there’s no evidence of willfulness, prosecution is probably not likely but in the course of the investigation, the auditor is looking for things called badges of fraud. They’re looking for evidence that you manipulated the numbers on your return in order to lower your taxable liability. If the errors are serious enough, it’ll trigger a referral to the Criminal Investigation Division of the IRS. So while the chances of jail are not exactly likely, if you’ve got a serious error on the return and you suspect willfulness it can and will trigger a criminal referral which is something that you don’t want to deal with.

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Representing Myself vs. CPA vs. Tax Attorney: Who Should Represent Me?

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Key Takeaways

  • Topic: Representing Myself vs. CPA vs. Tax Attorney: Who Should Represent Me?
  • I would tell you that sales tax audits are very complicated.
  • They’re complicated because of the amount of data involved.

I would tell you that sales tax audits are very complicated. They’re complicated because of the amount of data involved. They’re complicated because they involve statistics and they’re complicated because sales tax law is kind of a different animal than basic federal income tax law. Unless the people from your company or you personally have experienced dealing with sales tax audits, I almost never recommend that a client handle the audit themselves even if the client is going to work to prepare the documents necessary for the audit and do the prep work. I always maintain that it’s better to have a representative as the face of the audit versus having the client do it themselves. With respect to CPAs, the biggest problem that I see with CPA representation is that a lot of CPAs come from a compliance background and what I mean by that is when you’re a CPA, your job is to fill out tax forms and to fill them out accurately. The term certified public accountant means that you have public trust in preparing financial statements. That’s where CPA comes from. When you’re thinking about compliance oftentimes it’s very hard to shift into an advocacy focus and the difference between attorneys and CPAs is that attorneys mostly live on the advocacy side of things. So whereas most CPAs are compliance based (for example perceiving an audit notice with a document request and turning over all the documents to the auditor) a tax attorney would know to fight that. It’s not to say that some CPAs can’t be good advocates for their clients. In fact we know many that are and in fact that technical accounting background plays very well in a sales tax audit because oftentimes the sales tax auditor has their own background in accounting, but you want to make sure that there’s an advocacy component of it because knowing the sales tax law isn’t everything. The knowledge of tax procedure in a sales tax audit is really critical to success in the audit. You want to have a representative that can not only handle the audit, but can handle any subsequent appeals, that can deal with the settlement section of CDTFA or who can go litigate the case at the office of tax appeals in California. If absolutely necessary, because of this, most CPAs that I know that do sales tax audits are only limited to the audit level and while they do a very fine job,

I think the client is better served in a lot of situations, particularly when there’s any risk involved, by having somebody who’s more comfortable at the higher levels and can provide a much broader representation of the client. By far the biggest successes that we’ve had in the appeals process are those audits that we’ve handled initially, because we’re able to load the record at the audit level with things that are going to help us later in Appeals. Whenever we do a sales tax audit as a firm, we’re constantly building the record and putting information in there that we know we’re going to have success on either at the settlement level or the Appeals level. If you don’t have familiarity with the highest levels of the process it’s really hard to do that during the course of the audit.

What Are the Types of Penalties That I Could Face in the Audit?

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Key Takeaways

  • Topic: What Are the Types of Penalties That I Could Face in the Audit?
  • The most common penalty is the negligence penalty which is about 20 percent.
  • If at all possible you want to avoid that negligence penalty and knock this thing down to an accuracy penalty which is about 10 percent.

So the penalty structure in an audit is really rangy and it can range anywhere from a five percent penalty all the way up to a seventy five percent penalty depending on the conduct and the course of dealing during the audit and how the material is presented. The most common penalty is the negligence penalty which is about 20 percent. If at all possible you want to avoid that negligence penalty and knock this thing down to an accuracy penalty which is about 10 percent. An accuracy penalty is usually the best case scenario because the accuracy penalty is mandatory for adjustments that are $5,000 or more in tax. Generally speaking with most of our clients, although we try and get them out with flying colors, there’s usually some reason that the IRS has audited another return. So a $5,000 adjustment is usually not out of the ordinary; however, we’ll do everything that we can during the course of the audit to mitigate any penalties. For more serious cases, the goal in the audit is to mitigate the civil fraud penalty which is a 75% penalty. In addition to the 75% penalty on top of the tax that you owe, civil fraud prevents certain resolutions within IRS collections. That’s why it’s really important to avoid the stigma of fraud going forward in your IRS matter.

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What Does the IRS Appeals Process Look Like?

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VideoBG12

So IRS appeals is supposed to be an independent body that is neutral and that’s designed to resolve disputes with the IRS prior to going to tax collections. In reality Appeals is staffed with a bunch of former auditors and a bunch of former collection agents however we’ve had a lot of positive experiences in the course of Appeals in this firm so I like dealing with appeals. I find the appeals process is generally fair and impartial and generally yields a pretty good result depending on the circumstances. Now the good news with appeals is that the auditor is not involved in the process at all. The auditor has taken

Key Takeaways

  • So IRS appeals is supposed to be an independent body that is neutral and that’s designed to resolve disputes with the IRS prior to going to tax collections.
  • the time to prepare and submit an audit report which gets forwarded to appeals, but you have the opportunity before the case gets to the appeals officer’s desk.

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