Tax Controversy: Part II—Audit
If you have managed to land on the IRS’ (or Department of Revenue’s) radar, and the agent is conducting an examination of your return, you are undoubtedly considering your options. This article is intended to give you an idea of what to expect and some of the key considerations along the way.
There are three main types of audit: Correspondence, Office, and Field.
A «correspondence» audit is conducted largely by mail. This is the kind of examination used for most individual and small business taxpayers. A correspondence audit is limited to issues that can be verified from records that can be forwarded to the examining agent.
The agent will send you a letter requesting information or explaining how the return needs to be corrected. If you agree with the agent’s analysis, you can just pay the difference and move on with your life. Even if you disagree with the analysis, you may decide it’s not worth paying an accountant or attorney to fight and you will pay . . . and move on with your life.
This article is aimed a helping those who disagree with the agent’s position–or are hoping, at least, the agent is wrong– and who are not willing to just go ahead and pay.
An «office» audit is where the agent will request you meet with the agent at an IRS office. You do not actually have to go in person. Your accountant or lawyer can appear on your behalf . . . and that would almost certainly be better.
If you are asked to come to the agent’s office, there should be a description of the issue(s) under scrutiny and the documents the agent needs to review. Essentially, the agent has doubts about the tax treatment in your return and will be looking for documentation to support your position. If you do not have the documentation–or the information you have does not support your position–then, obviously, the agent will try to disallow your tax treatment and ask you to pay the difference.
Field audits are reserved for the largest and most complex returns, usually those of large companies. These taxpayers probably have a team of tax professionals and are not reading this article, so the focus here will be on the correspondence and office audits.
Establish a Rapport
Look, don’t antagonize the examining agent. You do not have time to be audited, you’re unhappy about the money it’s going to cost you, and you don’t need the extra stress.
All that is certainly understandable. The agent maybe even gets it, but that is not going to keep her from doing her job. In fact, the opposite is more likely to be true. The agent may decide to open the scope of the audit, which is only going to mean more time, more money and more stress.
If you are going to be irritable, then you really need to do yourself a favor and stay away from the agent. Let your accountant or attorney do the talking. Nothing good will come from getting the agent’s dander up.
Now, that said, there is a flip-side to that coin. Agents are themselves subject to human frailties, and they sometimes use techniques, too.
You may find your agent is irrational, intimidating, unresponsive, accusatory, sarcastic . . .
It happens. If you have this kind of experience, it is time to seriously consider bringing in a tax attorney. Accountants are very good at what they do and may be a bit less expensive. But, let’s face it.
It would be a very exceptional accountant who will put his foot down with an IRS agent. They don’t really have the wherewithal for that sort of thing.
Accountants don’t have the weapons to put up a lot of resistance, nor is it in their interest to do so. First of all, the accountant really wants to maintain a good relationship with the agent and everyone in the local IRS office. Second, the accountant cannot litigate. If the accountant goes over the agent’s head, he is probably going to escalate himself right out of the picture. That is just a something of which you need to be aware.
That brings us to another key issue.
Controlling the flow of information
As soon as the process started, you wanted it over with, right? The last thing you want is for the scope of the audit to increase. This is a damage-control situation. You need to carefully limit the issues the examining agent scrutinizes.
I do not mean to pick on accountants but, again, there are some realities of which you need to be aware. There actually are rules about the information the IRS or DOR can force you to turnover. You actually do have some recourse you can use for leverage, and you can safely push-back when it comes to the information being requested.
A tax controversy attorney is a litigator knows the rules of evidence inside and out and feels perfectly comfortable pointing out to an agent–who is not an attorney–that a request is outside the bounds. That can be a very important advantage.
Also, you can escalate. You can ask to deal with the agent’s manager, you can get to an appeals officer, and you can file a petition in tax court. Obviously, you want to avoid the extra complications–so does the agent. The fact that you have a tax attorney who is willing and able to go the distance if necessary gives you a strategic advantage.
Your accountant is probably going to encourage you to turn over anything and everything the agent requests. Your attorney will respectfully object to the agent’s request and cite to the rule or statute that supports his position.
That is how you limit the scope of the scrutiny and take some control over the process.
If any of this sounds like your situation, contact us for a free consultation.