I'm Being Audited! No one enjoys opening up their mailbox (The IRS only corresponds through U.S. Mail with taxpayers) and finding a letter from the IRS!
As an Enrolled Agent, I automatically offer to represent my clients once I am notified of an audit or other issue. This means you will never have to personally face an IRS agent, unless of course you want to.
Many audits are what are called "correspondence audits" and simply involve responding to a notice (usually CP2000) and addressing a discrepancy on your return. Don't assume because you have received such a notice that it is correct. Mixups occur and prompt attention to the issue is your best plan of attack to resolving the item.
A field audit could involve the IRS coming to your home or business, however many audits are completed either at the IRS office or tax practitioner's place of business.
Auditors will first look for unreported income. A variety of techniques are used to determine whether or not your return may be inaccurate. The following techniques can be expected in a typical IRS audit:
1) Interview - the auditor will ask you (or your representative) about bookkeeping procedures, banking protocols, whether or not there is cash on hand etc.
2) Matching - the auditor will review information received from 3rd parties that may indicate you have received income and look to make sure it is included on your return.
3) Lifestyle - the auditor will look at your reported income and compare it to your lifesytle. Is there a major disconnect?
4) Traditional Audit - review of records and books. Comparison of business info to industry wide statistics.
Not all audits result in the assessment of additional tax! If an audit uncovers minor errors on your return, the auditor will propose an adjustment to the return and assess additional tax. In the case of major errors on the return, severe penalties and/or criminal prosecution could apply. A substantial understatement of income could open the taxpayer up to a stiff negligence penalty. In addition, the normal period that the IRS has to collect taxes could be extended under these circumstances. In a worst case scenario, the audit could cascade and open up additional years in addition to the original year under audit.
Following any audit change at the IRS level, your state income tax returns will need to be amended to reflect the changes. (The IRS and state tax authorities share information).
Audits can also occur at the state level and then the process is reversed. Any audit adjustments by the state department of revenue, require an amended federal return to be submitted to IRS.
When I prepare your return, I have in the back of my mind the possibility that any client can be audited. This is why I ask you questions and take the time necessary to insure your return is prepared correctly the first time, greatly reducing the odds you will ever receive one of the dreaded IRS notices in the mail.
When an audit leads to a formal face to face meeting with the IRS, I almost always offer to take Power of Attorney from my client and collect their information at my office. I then arrange for the meeting and attend on the client's behalf. Depending on the location of the audit, I spend 4-8 hours including travel time to and from the IRS office. After the audit is completed, I handle the final paperwork in settling with the IRS and getting the matter closed. All of this is time consuming - but done at no extra charge for my clients.
Very few of my clients will ever receive a notice from the IRS or State tax authorities. My 27 years of experience has taught me what the government needs in order to accept your tax return and I make sure it is 100% accurate and complete. This saves both my clients and myself a lot of aggravation.
Todd's Tax Service LLC
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