In this blog we will talk about surviving an IRS Audit. I will cover what to expect and what steps will happen.
I got an audit letter from the IRS – What do I do?
The IRS will never call you to tell you they are auditing you, and they will never ask for money over the phone. When you get the letter, we suggest you read it carefully and make an appointment with your CPA immediately to review. The letter will tell you what period(s) are being examined and may further explain what line items the IRS is interested in looking over. The auditor can always expand the years and the line items later.
The good, the bad and the ugly
It’s time to sit down together and go through the return line by line and make sure you have the receipts to back up the deductions you claimed. This is where the rubber meets the road. We want to make sure you have all the receipts and can back up all those days out that you claimed on your tax return. If by chance you fudged some numbers to lower your taxes, now is the time to be honest with your CPA. A well-prepared CPA can make an early settlement with your IRS agent or officer if they know what they are facing.
Go home and find all your receipts
It’s important your CPA has all the information in front of them when they sit down with the IRS the first time. Having well documented receipts tied and tagged to the amounts on the return go a long way in putting the agent at ease that this return is correct.
What happens next?
The IRS agent will take all the documentation you provide, or don’t provide and create what your tax return looks like in their world. They can call multiple meetings and may want to physically visit your farm or place of work to inspect. They can subpoena your bank to give them copies of your statements, deposit slips and checks for the examination. This will not happen if you are honest and provide everything that they ask for.
Ordinary & Necessary
They want to be sure you have receipts for all your ordinary & necessary business expenses. Ordinary & necessary is a legal standard applied by the IRS. The expense must by ordinary and accepted in your trade or business. It also must be necessary, which is defined as helpful and appropriate for your trade or business.
Did you report all your income?
A common issue is that a taxpayer did not account for all their deposits in their multiple bank accounts as income, loan proceeds, reimbursement or other. The IRS will find these deposits upon audit. As stated above, being honest with your CPA from the beginning is your best bet. Did you have a second account that some of your receipts were deposited into and you didn’t include that account at year end because you thought it contained no business transactions?
The IRS goes to work
This is when the agent or Officer will prepare an adjustment sheet based on the information they believe to be accurate and they will send you a worksheet showing how they came up with their numbers and how those numbers may differ from your numbers. When you receive this information it’s really time for your CPA to go to work. They must reconcile the IRS numbers with what they have found and communicate back to the IRS what you agree with and what you do not agree with. If there is not a meeting of the minds between you and the IRS you will have a decision to make.
Appeal or Tax Court
You can appeal the agent or officer’s findings to the appeals officer in their office. This will often result in a slightly better outcome if you truly have items of merit that the IRS has not considered yet. You can also choose to go to Tax Court to fight the ruling if you have a question of law interpretation. The downfall of going to tax court is that you must pay the taxes the IRS says you owe before filing a suit on Tax Court. Your CPA can assist you in finding a Tax Attorney to represent you in Tax Court.
The End
In the end it is always the best plan to be honest on your tax return and always maintain good books and records and keep all your receipts. Going through an IRS audit is an anxious time that can be avoided. Once your audit is complete there could be other steps that will follow. If you have disallowed expenses or unreported income that makes your income go up, you should expect a notice from your state asking for their share. If by chance it was unreported income you may also be notified by your state that they believe you owe more in sales tax.
As always, please contact your CPA if you have any questions.
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