While tax season is the time of year when the IRS is on one’s mind, it is not the only time of year when the IRS is in full swing. The IRS also sends out notices about potential errors on taxpayers’ returns and performs audits all year. These notices can be stressful, and the prospect of a full scale audit can be overwhelming.

Whether or not triggered by a notice, sometimes an IRS audit is unavoidable. IRS collections and audits are tightly regulated processes that are designed to protect a taxpayer’s rights, but a taxpayer must be familiar with these rights in order to take advantage of those protections. Taxpayers can make the audit process easier by keeping in mind the following tips.

Timeliness Matters

A taxpayer’s response to one of these IRS letters should be a relatively painless experience in most cases. A tax professional can quickly identify the information requested or issues raised in these notices, and may already possess sufficient information to prepare a response. But in any case, it is very important to identify and adhere to the date upon which a response is required. Simple matters can quickly escalate to unwarranted tax assessments and penalties when a timely response is not made, where IRS liens and an expiration of certain rights to challenge the assessments are also possible.

During examinations, the IRS formalizes requests for information through issuance of an “Information Document Request” (IDR). The IRS agent and the taxpayer commonly agree upon a response date to an IDR, and it is very important to meet this response date with information that adequately responds to the matters requested.

Stick to the Information Requested

A common mistake that can be costly is providing the IRS with more information than it requests during an audit, including items that are not at issue. For example, if a taxpayer is subject to an examination regarding travel expenses, a submission of tax related receipts that include unrelated matters like charitable contributions may unnecessarily expand the scope of the exam to include those other matters.

Seek Help with Substantiating Your Deductions

Documentation requirements for various deductions are spread throughout the tax code. Charitable deductions, travel and mileage expenses, meals expenses, and medical expenses are all subject to documentation requirements. The general rule is that a taxpayer will be denied a deduction, even if the expense is legitimate, if the IRS examines the return and finds that the required documentation is lacking to substantiate the expense. A tax professional may be helpful to identify and organize the required documentation, and can suggest alternative forms of documentation such as bank records in appropriate circumstances.

Enlist Help with the Audit Process

Another benefit that a tax professional brings to a taxpayer’s interaction with the IRS is a form of neutral ground. A tax professional can provide office space in which an IRS auditor may come to conduct an examination, in lieu of IRS presence on the taxpayer’s premises. This environment is generally favored by all parties, as it is free of distraction and can mitigate a potentially adversarial relationship directly between the IRS auditor and the taxpayer.

There May Be Room for An Appeal

There may be circumstances during an audit where there is a difference of interpretation in a law or regulation. These differences can be resolved through an appeals process or litigation. Appeals is an area where taxpayers are even less equipped to represent themselves. In fact, many taxpayers may not even know or understand that the IRS has a robust appeals process.

The IRS Office of Appeals is an independent organization within the IRS, where a taxpayer can request a review of the auditor’s decisions.  If a taxpayer misses the timeline to file his appeal, he may be able to request audit reconsideration, where the taxpayer asks the IRS to reexamine the audit. During this process, the taxpayer can even provide additional information to bolster his case.

This process has very specific rules and timelines, however.  And some time frames are flexible while others are rigid. For example, if a taxpayer receives a notice of deficiency, he or she must file a petition in Tax Court within 90 days from the date of the notice, or he or she loses the right to challenge without fully paying the tax.  If it’s a collection notice, on the other hand, then the timeframe drops to 30 days, or sometimes 10 days.

Tax Court is only one litigation option. Taxpayers can also file in federal district court or the Court of Federal Claims, but to do so they must pay the full amount of the deficiency first.

Broaden Your Bench

All of this is boils down to one point. If the IRS contacts a taxpayer regarding an error or omission on a tax return, or it decides to audit a taxpayer or a taxpayer’s business, the first call should be to an experienced tax professional to assist with the process. Again, timeliness is critical to a successful outcome involving notices as well as responses to an IDR during an exam. For more information about how a tax professional can help in these circumstances, please contact us.

Published on June 18, 2019