There are generally three types of audits:
Correspondence audit:
The Internal Revenue Service sends a letter asking you to verify
certain items of income and deductions on your tax return. Generally,
you can respond by mailing copies of your documentation (never mail
the original documents) back to the IRS. If the IRS finds that you
owe tax and you don't agree, you may request an office audit.
Office audit:
You receive a letter from a local IRS Office requesting that you
call for an appointment. The items in question will be listed in
the letter. After making your appointment, you and/or your representative
will take the records into the IRS office, and there you will verify
your deductions and discuss with the agent any points of law on
which you may not agree. If an agreement is reached with the auditor,
your case will be closed. If you don't reach an agreement you may
appeal (See "What if I don't Agree With the IRS") below.
Field audit:
This type of audit is normally used for businesses. The auditor
will come to your home or place of business. A field audit may also
be conducted in your Enrolled Agent's (EA's) office, an especially
good idea if your bookkeeping was done there as well.
How is a Return Selected
for Audit?
Normally a tax return is selected for an audit
based on a combination of factors such as the amount and type of
income and the amount of certain deductions. For example, if you
operate a business or have rental property, your changes of being
audited are slightly higher. In addition, people who have medical,
charitable, or business deductions which are above the norm stand
a greater chance of being audited. One type of audit is completely
random, the Taxpayer Compliance Measurement Program (TCMP) audit.
Returns selected for TCMP audits may contain little income and do
not necessarily fit the criteria listed above. You should never
omit legitimate deductions simply because you're afraid of being
audited. Normally not more than two percent of the population is
audited. Even if you don't take advantage of all the deductions
you are allowed, you may still be audited. Since you're more likely
to be audited if you have failed to report some income, you can
limit the risk of being audited by accurately reporting all of your
income.
What Should I Do if I
Am Audited?
For an office audit, you must call for an appointment
as soon as possible. Next, you should consult with the person who
prepared your tax return for help in determining which records will
be needed for the audit. After you have found all your receipts
and documents needed for the audit, put them in order for the appointment.
If you take a bag of receipts to "dump" on the auditor's
desk, the auditor will probably make you take them home to organize
them.
Who Can Represent Me
at the IRS?
Remember: It isn't necessary that you go to the
IRS office yourself. Anyone can go with you to an IRS audit to present
receipts. However, only three types of individuals are able to represent
you by arguing points of law with the IRS; an EA, a licensed CPA,
or an attorney. Any of these three professionals may go to the IRS
on your behalf to present your records and argue your case. These
individuals are well acquainted with tax law and IRS procedures.
Consequently, it is often best if an EA, CPA, or attorney handles
your case.
What if I Don't
Agree With the IRS?
If you don't agree with the auditor, you
may appeal your case using the following procedures:
- First, you may appeal to the auditor's
supervisor.
- Next, you may appeal your case
to the appellate division of the Internal Revenue Service.
The appeals officer, although an IRS employee,
is often more knowledgeable of the law. Consequently, it is common
to reach an agreement at this level. If you still don't agree with
the appeals officer, you may appeal to tax court. This may be done
without paying the tax due if you file within the time allowed.
The IRS will issue you a Statutory Notice of Deficiency if there
is no agreement. You have 90 days from the date this notice is issued
to file a tax court petition and have your case heard without paying
the tax.
Depending upon the amount owed, you may
elect to file your case in Small Case Tax Court where an attorney
is not needed, cases under $50K are handled this way, and need permission
of the Court. Otherwise, you would file your case in regular tax
court. As an alternative to tax court, you may pay the amount of
tax due and file a suit for refund in either a U.S. District Court
or US Claims Court. Most cases are settled before they reach the
tax court.
An EA can handle your case from the audit
through the appeals process up to the point where you elect to file
in tax court, and then even to the day of trial to work out a settlement.
If you need further assistance, please contact
us.
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In
our country, we have a voluntary compliance system of taxation.