There are three types of audits conducted by the IRS: mail (correspondence), office, and field audits. Mail audits are the most common. However, field audits are the most comprehensive, requiring much more due diligence, preparation, and interaction with the IRS.
Audit Risk
In 2017, the IRS conducted about 1 million audits on 150 million individual and 15-18 million business/specialty taxpayers. About 90% of all audits result in additional tax owed. If there is additional tax, the IRS can assess a 20% accuracy penalty on the additional amount owed. If fraud is found, the IRS can assess an additional 75% penalty as well as pursue criminal prosecution.
Mail Audit Best Practices
The most successful mail audit outcomes come from a timely, complete response to the IRS on the issues presented. Late or incomplete responses usually result in the IRS assessing additional taxes, penalties, and interest that is difficult to reverse. To reverse premature IRS assessments, taxpayers must ask the IRS for audit reconsideration.
Face to Face Audits Have the Most Risk
Office and field audits are conducted face-to-face with the IRS. In these types of audits, the IRS is auditing both the tax return and the taxpayer – this means that the IRS is looking for unreported income and testing the taxpayer’s intent to file an accurate tax return. Field audits are often performed on business, international, and wealthy taxpayers and are very complicated and comprehensive. Taxpayers should rarely represent themselves before the IRS in face-to-face audits.
Appeal is Available
IRS audits result in an additional tax, penalties, and interest owed in 90% of the cases. If there is a change proposed by an IRS auditor, the IRS offers the taxpayer the ability to appeal their findings before the tax is assessed. These procedures require that you timely protest your dispute with the IRS and clearly present your facts, tax law, and position with the IRS appeals office.
Audit Solutions
Mail Audit Response and Follow Up
Mail audits are generally not in-depth examinations and focus on a few identified issues. The solution for mail audits is to provide the right response in a timely manner that best represents your tax return position. Face-to-face audits are intrusive and require thorough planning, presentation of facts and tax law position to the IRS, and procedural rules to obtain the best outcome. In a face-to-face audit, you are much more likely to have to appeal the audit findings.
Mail audits, like CP2000 notices, require that you respond timely to the appropriate IRS correspondence exam unit and address each issue with documentation and explanations outlining your tax position. These responses also require you to address penalties and request an appeal should the IRS disagree. If the IRS requests additional information, you will need to respond timely and provide adequate legal explanations on your tax return position.
Face to Face Audit Representation
A CPA, enrolled agent, or attorney can act on your behalf and advocate for you in any IRS audit. The representative becomes your “power-of-attorney” and is able exclusively speak to the IRS on your behalf. Taxpayers should rarely represent themselves in these most complicated of, and often costly, IRS audits. The tax professional will deal directly with the IRS agent during the exam and provide them with information and a tax return position.
Successful face-to-face audits require extensive preparation and analysis of the taxpayer’s finances, business, and tax return positions. The CPA will be able to conduct a pre-contact analysis of important financial records such as your bank statements and business records to best present your situation before the IRS. The representative will interact with the IRS throughout the audit process, including any appeal on disputes that you may have with the IRS auditor.
Audit Reconsideration
If you do not agree with the results of an audit, the proper avenue to address your disagreement is to appeal your case to the IRS Office of Appeals. However, if you have missed the deadline to appeal (30 days from the issuance of the audit results – called a “thirty-day letter”), you can request audit reconsideration if the IRS has not considered all of your arguments and/or documentation. Audit reconsideration is common in mail audit cases because the IRS automatically sends letters that taxpayers either miss or do not know that it is the time to appeal.
When the IRS sends a Statutory Notice of Deficiency (called a “SNOD” or “90-day letter”), the IRS no longer has your case. Your options are to petition the US Tax Court within 90 days or request audit reconsideration if the IRS has not considered your argument. One important note: taxpayers do not have a right to audit reconsideration. However, the IRS often grants audit reconsideration in those cases where the taxpayer’s argument and evidence has not been heard and considered.
Appeals
If you disagree with any audit findings, the tax code provides for taxpayers to be able to appeal their determination prior to assessment. The most often appeals route is to the IRS Office of Appeals. The other avenue to appeal prior to assessment is to petition the determination to the US Tax Court. You must timely and properly request assess to either of these pre-assessment appeals venues. Appeals cases are often left to experienced tax professionals who can properly assess your risks, petition appropriately and timely, and represent you before the Appeals Officer.
Offer in Compromise: Doubt as to Liability
The OIC-DATL solution is rarely used to contest an audit. However, if this option can work like the audit reconsideration. If the tax is already assessed and the taxpayer’s appeal options have been exhausted or not used, OIC-DATL is a solution option. The taxpayer files Form 656-L with all of the supporting documentation and argument to refute the audit adjustments. The IRS can decide based on the evidence provided or “re-audit” the taxpayer.
