How to Deal With an IRS Tax Audit

May 31, 2016 | Blog

Image of IRS agent auditing tax paper workAn IRS audit is commonly perceived to be reserved exclusively for dishonest, irresponsible taxpayers. However, one of the most important things to remember about IRS audits is that they are not synonymous with an accusation of wrong doing. IRS audits are simply a review to verify the accuracy of a taxpayer’s return, and can happen to virtually anyone.

For taxpayers whose returns are selected by the IRS, it is vital to understand the audit process, a taxpayer’s rights when dealing with an IRS audit, and audit defense strategy. Since there are so many taxpayers out there that are currently facing an IRS audit, we’ve put together some essential information to help clarify the process.

  1. Types of IRS Audits:  First and foremost, if you are to be audited, the IRS will always inform you ahead of time with a letter in the mail or by telephone (generally not by email). There are three types of audits that may occur thereafter:
    • Correspondence audits: This usually happens because a taxpayer made minor mistakes when filing. This requires the taxpayer to mail information to the IRS, and if the IRS is satisfied, the case will be closed.
    • Office audits: In this case, a taxpayer will be required to bring specific tax related information in person to an IRS office for review. An example would be the IRS wanting to see cancelled checks and medical bills for a taxpayer that claimed a high medical expense deduction.
    • Field audits: In this instance, an IRS agent will visit your home or business to verify the accuracy of your tax return.
  1. IRS Audit Red Flags: There are several specific reasons that the IRS may single out a particular return for an audit. A good rule of thumb is to always be prepared for the possibility of an audit and have extensive documentation ready, just in case. Your return may be flagged if:
    • You fail to report: all taxable income, a foreign bank account, or gambling winnings.
    • Your return claims: higher than average deductions, high income levels, rental losses, 100% business use of a vehicle, or day trading losses.
    • You show deductions for: business meals, travel and entertainment, large charitable contributions, alimony, a home office, or writing off a loss for a hobby.

There are many other factors that may cause an audit (including bad luck).

     3. Taxpayer Bill of Rights

    • Right to be Informed,
    • Right to Quality Service,
    • Right to pay no more than the Correct Amount of Tax,
    • Right to Challenge the I.R.S’s position and be Heard,
    • Right to Appeal an I.R.S. decision in an Independent Forum,
    • Right to Finality,
    • Right to Privacy,
    • Right to Confidentiality,
    • Right to Retain Representation, and
    • Right to a Fair and Just system

If you are selected for an audit, don’t despair! You can request a postponement if you aren’t ready when the IRS comes calling. As professional San Jose tax attorneys, we also recommend that taxpayers faced with an audit meet with an audit lawyer to discuss strategies. Your representative should also answer reasonable and non-privileged questions asked of you by an IRS agent.  If you are found to owe a tax liability you don’t agree with, try to reach a reasonable compromise with the IRS. Finally, remember that you can always appeal the results of an audit!

San Jose tax attorneys of Tax Helpers are ready to help you address your tax problems. Contact us today to see how we can help you deal with the IRS and manage your audit exposures!