During an income tax audit, federal and state taxing authorities grant the taxpayer permission to consult with an authorized representative. This representative must have the required credentials and the legal right to practice before the IRS or state, and is typically an attorney, CPA, or enrolled agent. The purpose of an audit representative is to develop the optimal approach to advocate on behalf of the taxpayer. They help the taxpayer to prepare all requested documents, and they generally handle all correspondence on behalf of the taxpayer, including attending required meetings.
While majority of IRS audits are just a letter asking for more information about your tax returns, some people get a request to meet with an IRS agent to discuss your tax forms. If you happen to get this dreaded request, don’t panic. We’ve got some tips and tricks to help you best maneuver a tax audit.
When it comes to dealing with the IRS, ignoring them is the worst thing to do. It won’t make the situation go away, and often times makes it worse. Although you should respond in a timely manner, you or your audit representative can request an extension to gather the necessary documents. When necessary, requesting a two week extension is not unreasonable.
Typically, the letter you receive in the mail is simply a request for information. This could be something as small as asking you to mail in your 1099 form or your receipts for the business expenses you deducted. If this is the case, mailing the requested documentation is generally enough, and legal representation is not necessary.
However, if you can’t find the information being requested or if an agent has requested to meet with you, you should hire legal representation (such as a tax attorney). When taking this route, you’ll need to grant power of attorney to your audit representative, which allows them handle everything on your behalf.
It’s important to note that working with a tax professional on your audit case will allow the requested information to be prepared in a way that’s easy for an IRS agent to read, thus increasing your chances of a successful tax audit.
When it comes to audit selection, only about 2% of them are randomly selected. The other 98% of the time, the IRS has a specific agenda. They have questions they want answered and will request certain documentation from the taxpayer. This means two things: provide all the forms that have been requested and answer all questions truthfully.
Although providing documentation is important, answering the IRS’s questions truthfully is critical in an audit case. After all, if the IRS is questioning your reported income, it’s likely that they think you’ve under-reported on your tax return. The audit is your chance to sway the IRS in a different direction, without oversharing information that could lead the IRS down a different path.
When the audit is complete, the IRS agent will assess your tax liability with penalties included. This assessment has the opportunity for appeal. Sometimes, the IRS will cut you a deal in order to not have the case to drag on. In this scenario, it’s beneficial to hire skilled audit representation, such as a tax attorney. Tax attorneys are often skilled at escalating the case appropriately, making the case easier to settle without taking it to court.
If your tax return has been selected for an IRS audit, don’t worry. We’ve represented many clients (individuals and businesses) during their tax audits and would love to do the same for you. You may believe that you haven’t done anything wrong, however we always recommend having an experienced tax professional on your side. Our trusted tax advisors will help you understand your rights as a taxpayer, serve as a buffer between you and the taxing authorities, and give you the protection you deserve.
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