Keeping Proper Records
W-2 forms, bank statements, paid bills, and all other records supporting the items appearing on your tax return should be retained for at least 4 years (preferably six), as the Internal Revenue Service or the California Franchise Tax Board may request thier reproduction in the event of an audit by them, of your return.
The major burden of proving the facts reported on your Income Tax Returns rests on you. We know the rules and follow them carefully, and if you can backup your deductions with the proper proof, then there is nothing to fear from an audit. The IRS reports that about 5% of all audits result in refunds! The vast majority of taxpayers overpay their taxes.
Some returns are selected at random for auditing and in the case that you are contacted, they are normally only requesting verification of some items on your return. Failure to respond is considered an admission of guilt and opens your return (and previous returns) to further investigation.
In any case, contact a tax professional or your attorney before signing any waivers or agreements of any type. Even though a deficiency should be proposed by the examining revenue agent, you have extensive rights of appeal. Many areas of tax practice are controversial and a lot of transactions fall into these areas. You are not required to pay any more tax then the law requires, but it is often necessary to argue a little to establish what amount it is that the law may reasonably be contrued as to requiring.
More than You want to Know about Audit Procedure.
There’s no reason to be troubled by the prospect of an audit if you know your rights and know the steps to guide the audit to a satisfactory conclusion.
KINDS OF AUDITS
The audit process begins when you receive a notice from the IRS informing you that your tax return has been selected for an audit. There are two kinds of personal audits;
Correspondence audits are the simplest. In most cases, they involve only one or a few Items and can be handled completely by mail.
Examples: The IRS asks you to send a copy of the receipt you obtained from a charity for a charitable contribution, or a copy of a brokerage account statement that verifies a capital gain or loss you reported on your return.
Office audits are what most people think of when they imagine “being audited.” You are asked to come to the IRS auditor’s office to answer questions about your return and to bring any records needed to document it.
FIRST STEPS
No matter what kind of audit you face, the audit notice should be accompanied by a copy of IRS Publication No. 1, Your Rights as a Taxpayer, which explains the audit and audit appeal processes. Read it carefully. You can also receive a free copy of Publication 1 by calling the IRS (800TAX-FORM).
Examine the audit notice carefully. Do not assume that the information on it is correct, the IRS has been known to make mistakes.
Things to check:
Has the notice been sent to the correct person? A divorce may result in an audit notice being sent to the wrong spouse, or the notice may be for someone else with your name.
Has the statute of limitations expired? In most cases the IRS must begin an audit within three years of…
…the due date of your return for the year being examined, or
…the Date on which you actually mailed your return for the year or
…whichever is later.
Is the information on the audit notice correct? Sometimes returns are flagged for an audit due to simple errors that are easily corrected, such as matching errors between amounts reported on 1098s and amounts shown on the return.
By quickly correcting such errors, you may speedily resolve the audit and keep it from spreading into other areas.
Have you been audited for the same reason within the last two years? If so, and if the prior audit resulted in no change on your return, inform the IRS and it probably will cancel the new audit. It is IRS policy to avoid repetitive audits unless there is a particular reason for the second examination.
Answering THE NOTICE
The IRS audit notice will suggest a time and location for the audit to take place. However, you have the right to ask the IRS to reschedule the audit to accommodate you.
A postponement may be sought to get more time to pull together records or resolve a scheduling conflict. The IRS usually is reasonable about granting postponements as long as it does not suspect the taxpayer of engaging in a strategy of delay.
A change of location for an office audit can be requested if you have moved since filing your return and now live far away from the IRS office that sent the audit notice. The audit may be transferred to an IRS office nearer you.
Representation: You have the right to be represented by a tax professional when dealing with the IRS during an audit. You don’t have to attend the audit if you don’t want to. The IRS cannot compel you to appear in person unless it has a particular reason for meeting with you, which happens in very few cases.
Having a professional handle the audit for you can be a very good idea that is well worth the expense.
- You’ll avoid the fear and anxiety that most taxpayers experience when dealing with an auditor and emotions that could lead you to commit costly mistakes.
- A professional will know much more than you about expediting the audit to a satisfactory conclusion.
- Having
a representative appear for you can help contain an audit. If an auditor turns to you and asks an unexpected question, you’ll probably feel the need to give some sort of spur-of-the-moment response, and in the process perhaps tip off the auditor about other items on your return to examine. But if the auditor asks an unexpected question of your representative, he/she can give an answer such as, I don’t know I’ll have to check with my client.
Auditors are under pressure to dispose of their case inventories in a timely manner, so they are less likely to engage in such time-consuming “fishing expeditions” when dealing with a professional representative.
PRESENTING EVIDENCE
The audit notice also will specify the items on your return that are being questioned and the records you should bring to support them.
Bring to the audit only records that were specifically requested. This keeps unrelated items that might be questioned out of the auditor’s sight
If the auditor asks for any further records, have him request them in writing. This eliminates any misunderstandings and creates a paper trail that may be valuable in future proceedings.
Organize records thoroughly before presenting them to the IRS. Auditors direct their efforts to the areas that seem most likely to be productive, and sloppy record keeping may be taken by an auditor as a sign that a closer examination of the books could be rewarding.
In contrast, comprehensive, organized records may give the auditor the impression that little is out of order and could bring the audit to an early close.
CONDUCTING THE AUDIT
If you attend the audit personally, it’s important to deal with the auditor in a professional, businesslike manner.
The IRS Manual prohibits a single auditor from conducting two audits of the same taxpayer within a three-year period (provided the earlier audit has been closed). So if your return is assigned to an auditer with whom you have dealt with in the past three years, and you wish to have a different auditor, inform the auditor’s group manager.
Avoid being antagonistic. Remember the auditor is just doing a job. Also a hostile attitude on your part may give the auditor the impression that you have something to hide and may lead to closer scrutiny of your case.
Nevertheless, it is possible that during the course of an audit, you will conclude the auditor doesn’t understand your position or is in some manner treating you unfairly. In that case, you have the right to meet with the auditor’s supervisor to discuss the problem.
Request such a meeting in a professional manner. You’ll have continuing dealings with the auditor, so you still don’t want to antagonize him.
If your problem involves a technical issue, it’s possible to request that the auditor seek technical advice in the form of a ruling on the matter issued by the TRS National Office in Washington, D.C. You can make this request to the auditor either verbally or in writing.
APPEALING
At the end of the audit process, you will receive a report by mail indicating what changes, if any, have been made to your tax bill. You then will have 30 days to appeal the audit results by taking your case to the IRS Appeals Division.
Opportunity: The Appeals Division provides you the first real opportunity to negotiate your case.
IRS auditors are supposed to look at every item on your return as simply being allowable or not allowable according to the tax law.
In contrast, IRS Appeals Officers have the authority to compromise on issues after considering the weight of the evidence, the “hazards of litigation”–the cost of going to court and the risk that the IRS might lose – and the importance that the case has to the IRS as a precedent. In fact, the great majority of cases that reach the Appeals Division are settled there and never go to court.
Important: If you haven’t been advised by a professional before appealing your audit, consult someone now to ensure that your case is presented to the Appeals Division in the most persuasive manner and to be able to evaluate accurately the attractiveness of any potential settlement
If you fail to reach a settlement with the Appeals Division, your last remedy will be the more costly and time-consuming step of going to court, so you’ll want the best advice available.
Disappearing from the IRS
It is simple and easy to avoid all trouble with the IRS. If you’re anything like the average tax payer, you live in fear of an IRS audit. Not because you have done anything wrong, just because we all know how the government operates. Most of us know someone whom they have audited, or heard horror stories about audits. The IRS has their computers set up to spot returns that fall outside the “normal” range of deductions. Once certain entries come up outside this range the return gets a “red flag,” and it gets kicked out to an agent to review. Other than that, the IRS runs random checks every few years just to see what they turn up.
It is absolutely possible to “disappear” from the IRS.
You know what they say about it being best to go easy on deductions? Nonsense. The flags that trip the IRS computers look for inconsistencies with the average return, so too few deductions can be just as bad as too many.
So many people, sometimes acting on the advice of misinformed CPAs or accountants, over pay their taxes, believing this will save them from an audit.
Big mistake.
You see, the IRS wants the easy money. They do not want to send out auditors to People who are going to fight them over every dime, and hammer out every deduction. An auditor’s job performance is judged by how much they collect from taxpayers. So when push comes to shove, they want the easy prey, where they know they can squeeze out more money. So a simple, conservative return may get even more attention than an aggressive one.
Over the years, I have discovered that there are ways of “green flagging” your tax return to sail right through the IRS computers. Not only that — you’re taking every deduction you can while you’re doing it!
To make yourself invisible to the IRS you will need to know how the IRS operates, what their computers are looking for, and how to avoid the most common mistakes they catch.
You can write off your Home Office and get away with it. The IRS won a 1993 Supreme Court victory against home business deductions, so they’re being more aggressive with these. But all you have to do is fill out one little form, Form 8829, attach it to your return, and it will sail past the computers. (Make sure to attach a description of your business activities, and summarize the time spent and activities performed in your home office, and in other locations.)
Bullet proof your claims for business vehicle use. Keep a good mileage log of your business travel and deductions. A good log is hard for an auditor to dispute.
Breeze through any noncash charitable deductions. If they total more than $500, just file Form 8283. You will need to accurately describe the property. Also, if your deduction goes over $5,000, include an independent appraisal of the property with Form 8283.
Have you caught the two prime keys to becoming invisible to the IRS yet?
Keeping good records and a knowledgeable tax preparer!
