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An audit is when the IRS requests that you contact them to provide proof of deductions, income, or to consider the treatment of various items on your tax returns. Many people mistakenly think that all they need to do is to bring their receipts and other information to the revenue agent as verification. What they don’t realize is that the IRS examiner is trained to ask probing questions, and to come up with reasons why your deductions are not acceptable. In fact, the professional community has complained that in a tax audit they often do not distinguish between the questions asked in a general audit versus a criminal investigation. You will be asked financial status questions focusing on your lifestyle, standard of living, and other elements unrelated to the items on your tax return. This is one reason why even if you have receipts, and feel that your return was prepared correctly, you could still be in jeopardy and it is necessary to hire the help of a professional. The tax code is written in a manner that leaves a lot open to interpretation. You must meet ‘purpose’ tests, and other tests that even many accountants take for granted. Basically, any time the IRS requires you to prove something to them, you need the help of an experienced professional who knows what the law is and how to argue your position. The ability to represent your position and at the same time maintain a good rapport with an IRS exam person is essential. Otherwise the IRS tax audit person can and will make adjustments against you.
IRS Audit Representation Before The IRS
Audits are selected based on IRS programs. One program looks for compliance and another tries to find errors. These days, auditors tend to be nicer. They tend to be more educated than the collection officers. They do not want to send your case to the criminal division unless they have to. At South Coast tax, we have never had an auditor accuse a client of criminal fraud and have the case referred to Criminal Investigation.
There are two main types of audits. Correspondence and face to face. If any of these produces a tax liability, then the IRS sends you an examination report. You have 30 days to appeal it. In a face to face audit, the letter will ask you to provide information to back up certain items on your return. You may have to prepare two sets of proof. One directly responding to the letter, and another proving all the other items on your return.
Notice of Deficiency – This Is Not The End Of The Audit
The Statutory Notice of Deficiency does not require you to make an immediate payment nor is it a tax assessment. The notice is simply a proposed deficiency, which usually gives you 90 days (or 150 days if the notice was addressed to a person outside the United States) to agree with or file a petition with the U.S. Tax Court for a re-determination of the deficiency. Once issued, the time period in which you have to respond cannot be extended. However, during this period, you may ask for an appeal. The Notice of Deficiency can only be rescinded under certain circumstances and requires that both parties agree. Contact South Coast Tax Resolution if you receive this type of notice and we will represent you to ensure the best outcome.
Once the audit is over, and you missed it, all is not lost. We can request an Audit Reconsideration and in many cases the IRS will open up the audit again, so that you can have a chance to present your proof for expenses, etc. An audit reconsideration may be requested if you subsequently obtain receipts you were not able to submit before.
We have represented people from various states without any problems. It is not necessary, or advantageous, for the tax payer to sit face to face with an auditor to prove his/her income and expenses. You should not let the auditor into your home or office to conduct the audit. As a representative, we have yet to have the IRS refuse to have us send the information by mail when we have an out of town client.