When the IRS Wants You
By Ric Edelman
Do your hands shake upon opening letters from the IRS? Don’t panic: Being audited need not be a terrible experience -- provided you keep accurate records.
There are three kinds of audits: Correspondence, Office, and Field. The Correspondence Audit focuses on simple errors that typically are corrected via mail. For example, letters from the IRS ask you to provide documents (such as receipts) that support information you entered on your tax return. In other cases, the letter may inform you that you underpaid your taxes due to errors you made on your return. In such cases, you’ll be asked to send additional money. Once you pay, the matter is over.
In an Office Audit, you are requested to bring documentation to an IRS office at a specific time and date. When you confirm the appointment, and if you have the documents requested, see if the agency will let you resolve the matter by correspondence.
The third, and most feared, is the Field Audit. In these cases, an IRS auditor comes to your home or office. This occurs when the IRS suspects major violations. For example, do you really have a home office? The agent needs to see it in order to allow the deduction.
Whichever type of audit it is, it all begins with a letter. When you receive it, the first thing to do is read it, and then read it again. Make certain you clearly understand what the IRS wants you to do. The letter will reveal the mistake the IRS thinks you made, and it will specify the parts of your tax return that the IRS is challenging. The letter also will say what you are expected to do, including when, where, and how you are to respond.
You made and kept a copy of your tax return and all supporting documentation -- you did, didn’t you? -- and you’ll need to get those papers now. (If you don’t have a copy of your return, the IRS can provide you with one. If you lack the supporting documents, such as receipts, try to replace them by contacting the vendors involved. If you can’t, you’re toast.)
When auditing by correspondence, the IRS will inquire about specific items, and you need respond only to those issues. But in office and field audits, the IRS search is often much broader. In fact, once sitting opposite a revenue agent, you will find yourself answering questions you might not have anticipated and which you may not understand. Therefore, never go to an audit. Instead, send -- the person who prepared your return. (Only CPAs, Enrolled Agents, and attorneys are permitted to represent you before the IRS, which is why I have always advised you to hire such a professional to prepare your returns.) By giving the professional your power of attorney, using IRS Form 2848, you don’t have to attend the audit (unless you receive an “administrative summons”) and that’s not good, because your big mouth will probably make the situation worse.
Also know your rights as a taxpayer by going to www.irs.gov for a copy of Publication 1: Your Rights as a Taxpayer. Here are some of your rights pertaining to audits:
- Once you have selected a tax professional, the IRS cannot interview you alone.
- Your personal and financial details must be treated confidentially.
- You can record the interview if you give ten days notice.
- Agents must treat you courteously.
- Agents should allow you more time to prepare for your audit if requested.
- Agents are required to communicate with you in non-technical language.
- If you have been audited in either of the last two years regarding the same tax question, but did not owe any additional tax, the IRS will usually suspend the audit after you point this out.
If you are not satisfied with the auditor’s decision, you can appeal to the IRS Appeals Office. (Download IRS Publication 3598: What You Should Know About the Audit Reconsideration Process.) Still not satisfied? Then contact the IRS Problems Resolution Office. If you still disagree, file a lawsuit.
Best approach: Complete your tax returns accurately, file them timely, and keep good records.
Edelman Financial Services (EFS) does not provide advice pertaining to tax matters. Information regarding tax matters which may be provided by EFS is of a general nature only, and is not to be construed as constituting specific advice. Such information can be provided only by a tax professional and EFS recommends that individuals consult a tax professional for advice concerning tax issues.