Articles Posted in IRS Tax Audit

I Don’t Agree With the Findings of My IRS Examiner. Should I Appeal?
Appealing the results of an IRS examination is usually beneficial to a taxpayer if there is a basis for disputing the findings. The process doesn’t cost anything (although it’s highly recommended that you retain a tax audit attorney), and could potentially result in significant tax savings, making it a good investment for many taxpayers. You could go directly to Tax Court to resolve your issues instead, but this is a more costly procedure, and you can generally go to Tax Court after filing your IRS appeal if you still aren’t satisfied.

Keep in mind that you should have a legitimate reason for disputing the tax liability before filing an appeal. If your only issue is that you can’t pay the tax, you can file an Offer in Compromise or request an installment agreement that allows you to pay off your tax debt over time.

How to Request an Internal IRS Appeal

Exceptions to The Three-Year Statute of Limitations for IRS Tax Audits
The general rule of the IRS is to audit returns that have been filed in the last three years. Because of this, some taxpayers may breathe a sigh of relief once the three-year period has expired, but the rules regarding the statute of limitations are not quite that simple. There are circumstances where the IRS can go back even further to audit your return or assess additional tax, and the IRS has unlimited time to assess tax in the case of an unfiled return.

IRS Audits for Substantial Errors

If the IRS detects a substantial error on your return, the IRS can wait up to six years after your return was filed to conduct an audit. A substantial error involves an understatement of income of more than 25%, based on the income claimed on the return. Congress has extended this definition of a substantial error to include basis overstatements which result in less capital gains tax being owed after the sale of property. Some of those are discussed below.

What Causes an IRS Tax Audit?
The IRS has several methods of selecting returns for a tax audit. First, returns are identified that may possibly contain incorrect amounts, causing a review of the return by an auditor. If everything on your return checks out, the auditor can accept your return as submitted. If the auditor suspects that something is amiss, your return can be selected for an examination.

How Returns Are Selected for Audit

The IRS can select your return for an audit if any of the following happens:

What to Expect During an In-Person IRS Tax Audit
No one looks forward to receiving a letter from the IRS notifying you that you have been selected for an examination, also known as an IRS tax audit. The IRS may choose to complete the examination by mail by requesting additional information about certain items on your tax return, or they may complete an in-person examination.

Just because your return is selected for an audit, it does not automatically mean that something is wrong. The IRS uses automated methods to select returns for tax audits, but an audit does not always result in an increase in your tax bill.

However, you still want to be cautious whenever you are selected for a tax audit. If you have any concerns about items on your return, you should strongly consider consulting with a tax attorney before you speak to the IRS. If you make false statements to the IRS, or if you accidentally say something that can be used against you, it could lead to more serious problems, including criminal tax charges.

How to Appeal Your IRS Tax Audit
Most audits can be appealed internally within the IRS, without requiring litigation in Tax Court. The IRS Appeals Office is independent from the IRS auditing division, and would prefer to settle cases quickly rather to take them to Tax Court.

There are several reasons taxpayers should consider appealing the results of an IRS tax audit:

  • you can receive substantial savings on your tax bill

How Many Years Does a Tax Audit Cover
The IRS generally will look at returns filed during the last three years during a tax audit. The Assessment Statute Expiration Date (ASED) places a limit for the time period the IRS has to make a tax assessment. The ASED is three years from the day the return was filed, but there are a number of exceptions to this three-year limit.

How Failing to File Affects a Tax Audit

If you do not file a tax return, the IRS has an unlimited amount of time to assess the tax. The IRS usually does not look back more than six years, but they can if they choose to. Once you file a delinquent return, the three-year ASED begins to run.

Key-Steps-in-Preparing-for-an-IRS-Tax-Audit-300x167
It doesn’t necessarily mean you have done anything wrong, but it still is something every taxpayer should be prepared for: notification of an IRS tax audit. Of course the best approach to preparing for a tax audit would be to ensure that your tax filings don’t warrant any undue attention, but that shouldn’t prevent you from taking every deduction to which you are legally entitled. An audit may simply be based on random selection, but that is very rare. The most prudent assumption is that the IRS believes that there may be errors with your return that need to be addressed. If you’ve been selected for a tax audit, here are some of the important steps to take:

  1. Gather All Your Records – Be sure to have all of the pertinent documentation together in one place that will substantiate any deductions or exemptions you claimed on your returns. Generally, the IRS is happy to receive digital copies of records. If you don’t have all your records duplicates can usually be obtained from financial institutions and vendors, but that takes time. Therefore you should get started as soon as you are notified of the tax audit. If you are in business you should review your bank statements, and compare them to your tax returns to make sure you reported all of your income. You should have tax returns for at least the past three years.
  2. Research – Make use of IRS publications that explain the procedure for audits, your rights as a taxpayer, the appeals process and more. Keep in mind though that IRS publications do not always represent all the nuances of the law, and the IRS is not required to follow its own publications.