Preparing For An IRS Audit: Part One

By: Dr. Peter Ikre

The Internal Revenue Service (IRS) has been in the news lately for witch-hunting or unduly targeting some 501 (c) (4) groups in the country, especially those affiliated with the Tea Party. They were singled out for additional audits or experienced unnecessary delays with their tax-exempt applications. If this can happen to groups with huge connections in the country, it is difficult to imagine the hassles ordinary folks go through in their dealings with the agency.  The IRS is a powerful organization with sweeping powers to enforce tax laws and ensure that tax dollars flow into government coffers at the stipulated time. As a reminder to some in the immigrant community with a lackadaisical attitude toward taxes, there is an adage that there are two constants in life: Death and Taxes. We know that the former is inevitable! However, the latter is mandatory for the working population. It is only a matter of time that the IRS comes knocking on one’s door to pay up or face incarceration. If one is to avoid IRS problems, it behooves one to do the right thing when it comes to filing taxes.  The period following the filing deadline of April 15 is usually inundated with letters from the IRS to taxpayers concerning questions about tax returns. It is pertinent that taxpayers take appropriate action to resolve the matter rather than ignore such inquiries.  To do otherwise may result in stiff penalties in terms of unbearable interest and late fee applications to the original amount owed.  In an effort to sensitize my brothers and sisters to the workings of the IRs with regard to the audit process, I have arranged a two-part series to assist taxpayers on ways to overcome the issue.

There is often a palpable trepidation following the use of the word ‘audit’ in any conversation. Sometimes, the apprehension emanates from misconceptions about the audit concept. I strongly believe that the chance of being audited in one’s lifetime is far greater than the likelihood of a lightning strike. To begin the series, it is logical to ask the question:  What is an audit? According to Morris and Morris (2004), an audit is an IRS assessment of one’s tax returns and the records to substantiate them. The major reason for such an examination is that the agency is convinced that the taxpayer owes the government some money. In essence, the agency wants to determine the authenticity of the tax returns. The auditing system is determined by a variety of ways including: a) manual inspection of the returns by IRS personnel, and b) random selection by the computer system. In the case of the latter, the computer may flag a return suspected to have a degree of deduction above a designated income level. Furthermore, there are really three types of audit, namely: a) correspondence audit, b) office audit, and c) field audit. The correspondence audit is the most convenient of the three. It is done by mail, and it involves sending copies (not originals) of requested documents. In the end, one is likely to owe some money. An office audit takes place in an IRS office in the presence of a tax auditor. Prior to the office visit, one is alerted to areas under examination and documents to bring to the deliberations. Despite the overwhelming reach of the IRS, it is good to know that the taxpayer has some protection under the law. It is important that you avail yourself of the following information before proceeding to an examination before the IRS. Morris and Morris (2004) aptly depicted these privileges as the Taxpayer Bill of Rights: a) release only the records requested by the IRS b) ask questions to clarify any misunderstandings, c) no DIY (do it yourself)- get someone to represent you, d) make recordings of the proceedings, e) terminate an interview if you need extra time to ensure a ‘favorable’ outcome or for professional consultation, f) can appeal findings of an audit or tax liens (claims on one’s property to secure tax payments), and g) can offer an installment payment plan.

Aside from the bill of rights listed above, other steps can be taken to ensure a successful encounter with the IRS.  One must cultivate the habit of keeping records for tax purposes. A good rule of thumb is to preserve tax documents for at least three years. Sometimes, the IRS can go back as far as 4-5 years depending on certain conditions. The only way to defend one’s position is the ability to present a reasonable amount of documentation in support of prior tax returns. A successful rendezvous with the IRS may require strengthening of one’s negotiating position by: a) controlling flow of information to the agency, b) not accepting IRS position readily, and c) only volunteer information if it benefits you. Next time, I will address the’ controversy’ surrounding representation during the audit process and make closing remarks about preparation tips. Thank you.

References

Jones, L. (2013, April-June). Examination: Negotiating with the IRS at the audit level. Journal of Tax

      Practice & Procedure, 5-8.

Morris, K. M., & Morris, V. B. (2004). The Wall Street Journal guide to understanding personal finance

       (4th ed.). New York: Lightbulb Press, Inc.

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Posted by on Aug 21 2013. Filed under Community News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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