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IRS Tax Audit Survival Guide

Are You Being Audited by the IRS?

While the chances of being audited by the IRS are slim, most taxpayers fear the day that the IRS comes would come knocking on their door advising that they have been selected for an audit.  While there is no way to ensure that the IRS audit process will be painless and stress-free, there are certain ways that you can help increase the likelihood of success of your IRS audit.  Below are a list of Dallo Law Group’s five major tips to surviving your IRS audit.

1.       Get your documents ready.

Your goal in an IRS audit is to convince the IRS auditor that the income, deductions and/or credits that are being questioned by the IRS are correct.  Doing so will invariably require you to produce financial documentation and explanations to support your claim that your tax return is correct.  Although the results of an IRS audit can be appealed, it is always best to prove your claim at the audit level to avoid the costs and stress of IRS appeals and litigation.  You will maximize your chances of success at the audit level if your documents are well organized and persuasive.

The best way to get your documents ready for the IRS is to keep them organized well before you were even selected for audit by the IRS.  Your CPA or Tax Attorney that prepared your tax return should have copies of much of the supporting documentation that was used to prepare your tax return.  If your tax preparer is organized and cooperative, the financial documentation supporting your tax return may be acceptable by the IRS and could result in a successful and much less stressful audit process.

In cases where the IRS is claiming that you underreported your income, the documentation from your CPA or tax attorney may not be enough.  In income underreporting cases, the IRS will likely ask for your personal and/or company bank statements for review.   Before submitting the bank statements to the IRS, you should obtain these documents from your banks (assuming you don’t already have them) and review them closely for any deposits, withdrawals, or transfers that the IRS may question.  You should always anticipate the questions from the IRS and prepare a response well in advance.

In cases where the IRS is challenging a deduction or credit that you have taken on your tax return, the IRS will usually be specific as to the documentation that they require to support the deduction or credit.  If the IRS request is too broad or vague, you may have the right to refuse to produce documentation in response to such request.  You should contact a tax attorney at Dallo Law Group to determine your rights and obligations in an IRS audit.

2.       When in doubt, ask the IRS for an extension.

In an IRS audit, the IRS will typically inform you of a response deadline.  Many taxpayers make the mistake of responding to the request too quickly in fear that missing the deadline will cause problems for them in the audit.   If you have not had the time or the opportunity to review your documentation before submitting it to the IRS, ask the IRS for an extension.  The IRS will typically work with you if you are cooperative and cordial.  You should always ask for a longer extension that you anticipate needing to avoid missing the extended deadline or making numerous extension requests.

3.       NEVER host an IRS audit.

The IRS will often ask that the audit take place at your home or place of business.  This common practice of the IRS is called a “field audit” and is the most intrusive of all types of audits conducted by the IRS.  Given the nature of a “field audit”, the IRS will often gain access to documentation and testimony of personnel and family members that otherwise would not be available to the agent.  Access to this information can be produce disastrous results in your tax audit.

Instead, you should consult with a tax attorney at Dallo Law Group and conduct the audit at our offices.  When dealing with the IRS, experience and education are critical.  A CPA trained tax attorney with a master of laws in tax degree, such as Michael Dallo, is experienced in navigating through your tax return and knowing how to substantiate your income, deductions, and credits.  A tax attorney is also a skilled negotiator and knows how to deal with an IRS auditor.

You should also avoid hosting an IRS audit at the office of your CPA or tax preparer. Unlike attorneys, conversation with CPAs and other tax preparers are not covered by the attorney-client privilege and your CPA or tax return preparer may be required to disclose the conversations you have with him or her during the course of the audit.

4.       Research the tax laws.

Surviving an IRS audit will often require some understanding of the relevant tax law on the issue that is challenged by the IRS.  You should never go into an IRS audit blind and unarmed and allow the IRS auditor to have the upper-hand in your audit.  There are a number of free resources online that can help you understand the relevant tax laws.  IRS publications are a good start and can be accessed by clicking here.  For the more legal-savvy taxpayers, you can access the Internal Revenue Manual here or the Internal Revenue Code here.

If you are still unclear or confused about the tax law, please know that you are not alone.  The U.S. tax laws are amongst the most complicated and technical areas of the law.  At Dallo Law Group, our San Diego Tax Attorney is educated and experienced in understanding and navigating through the complexities of the tax laws and would welcome the opportunity to assist you with your tax audit.

5.       Appeal the decision.

For many different reasons, your tax audit may not conclude in your favor and the IRS will send you a notice of proposed assessment, also known as a 30-day letter.  Many taxpayers feel a sense of defeat when they receive such a horrible letter from the IRS and just end up either simply paying the proposed tax or failing to respond to the letter.   You should never make either decision without first consulting with a tax advisor to determine your rights and options with regards to the audit decision.

The notice of proposed assessment issued by the IRS is not a tax bill and you have absolutely no legal obligation to pay the amount stated on that notice.  Instead, you have the right to appeal the decision of the IRS auditor with the administrative appeals division of the IRS.  In the event the audit decision can’t be resolved with IRS appeals, you may be able to further appeal the decision by filing a petition with the United States Tax Court.  Don’t fall victim to the strong-arm tactics of the IRS by simply giving up and paying the tax.  Feel free to contact a San Diego Tax Lawyer at Dallo Law Group to evaluate your IRS audit and help you understand your rights.

You should also never simply ignore the notice of proposed assessment that you receive from the IRS.  Ignoring the letter will invariably result in the issuance of a notice of deficiency (90-day letter) which is your ticket to tax court.  If you ignore this letter, the IRS will assess the tax, send you a tax bill, issue a federal tax lien in favor of the United States, and may commence collection activities against you.  More significantly, however, is that ignoring the 90-day letter will result in the loss of your ability to petition your case with the United States Tax Court.

For more information on the IRS tax audit process and to learn how an IRS Tax Audit Lawyer can help you with your audit, please click Contact Us.