Receiving an audit notification from the IRS can be extremely stressful. Taxpayers who have been audited are often unsure of how to handle the situation. Fortunately, an experienced tax attorney can evaluate a tax audit and guide their client through the process until the matter is resolved. If you have recently been audited and are seeking guidance from an experienced IRS audit attorney, you can learn more by contacting the Mississippi tax attorneys of Damiens Law at (601) 957-9672.
Not all Internal Revenue Service audits are the same. Some audits are relatively simple and can be resolved quickly, while others are complicated and may involve a detailed overview of the taxpayer’s financial records. The best course of action will depend on the type of audit and other variables.
Correspondence audits are conducted through the mail, otherwise known as written correspondence.
When the IRS decides to conduct a correspondence audit, they begin by sending the taxpayer a simple letter that notifies the taxpayer that they owe the IRS money. This letter is not an audit in and of itself, but the case can become an audit if the taxpayer fails to resolve the dispute after receiving the simple letter. Simple letters are often sent if the IRS believes the taxpayer has made a math error on their tax return or failed to report income that was reported to the IRS on another form (such as a 1099 or W-2 form).
When a taxpayer receives a simple letter, they have the option to either agree that a mistake was made and pay the amount owed (which includes taxes, interest, and sometimes penalties) or disagree and have the disputed items further examined. If the simple audit involves disputed items that can easily be resolved, the taxpayer may not need a tax attorney. However, taxpayers who choose to dispute the letter may benefit from legal guidance.
If the tax dispute is not resolved via a simple letter, the IRS will send an official audit letter that asks the taxpayer to provide specific documents to support deductions or other portions of their tax return. This is a real audit but can also often be resolved fairly quickly by simply providing the documentation that the IRS has requested, such as receipts or a written acknowledgment from a charity for a donation that was deducted on the tax return.
Taxpayers who do not have the requested documents may either pay the disputed amount to resolve the matter or dispute the matter through official IRS channels. If the issue involves significant money and the taxpayer believes the audit is unjustified, he or she could even take legal action against the IRS by hiring an experienced tax attorney. If you are considering disputing a correspondence audit by the IRS, you can learn more by contacting an IRS audit attorney from Damiens Law.
For more complex audits, the IRS may ask the taxpayer to visit one of their offices for an in-person meeting. Office audits are full-scale audits and are much more serious than correspondence audits. When the IRS issues an office audit, they send the taxpayer a letter requesting that they visit a specific IRS office at a designated date and time. The meeting date can be rescheduled by contacting the IRS.
Tax professionals like CPAs and tax attorneys may attend this meeting. Due to the serious nature of an office audit, it may be a good idea to seek legal guidance. The IRS may expand the scope of their inquiries based on statements you make and an attorney can help ensure that this does not happen, along with provide legal guidance on all other aspects of the audit.
An office audit can end either with no change to the tax return, an assessment of additional taxes owed, and occasionally a finding that the taxpayer is owed a refund. If the IRS does find that the taxpayer owes additional taxes, the taxpayer has the right to appeal the ruling and go to court.
Field audits are the most serious type of IRS audit and typically involve cases where the IRS believes a taxpayer owes them a very large balance. During a field audit, an IRS agent visits the taxpayer’s home, business place (if they are the owner), or accountant’s office. Unlike correspondence audits, field audits are comprehensive and not limited to certain portions of a tax return.
Individuals who have been selected for field audits should take the situation extremely seriously and consider seeking legal guidance from an experienced tax attorney.
Line-by-line audits are completely random. They are rarely issued but are used by the Natinoal Research Program (NRP) to provide the IRS with data that can be used to decide when future targeted audits should be issued. In a line-by-line audit, an IRS agent goes through every line of a tax return. While taxpayers are chosen at random for these audits, inaccuracies could result in additional taxes, penalties, and interest.
What can trigger an IRS audit?
The IRS processes the vast majority of tax returns without any further scrutiny, but there are certain aspects of a tax return that can make an audit more likely:
- Cryptocurrency – The IRS treats cryptocurrency as property for federal income tax purposes and these digital currencies are taxed in a similar way to stocks and real property. The agency has stepped up enforcement efforts on cryptocurrency through measures like data analytics and artificial intelligence.
- Net operating business losses – Business owners who claim net operating loss deductions are more likely to be audited. The IRS is currently prioritizing non-corporate business taxpayer compliance with the CARES Act, which changed the rules for net operating losses for those filing amended returns or tentative claims.
- Early withdrawals from retirement accounts – Taxpayers who make early withdrawals from retirement accounts with tax benefits are more likely to be audited if the withdrawal does not meet one of the exceptions that permits an early withdrawal to be nontaxable. The IRS has measures for detecting unreported early withdrawals.
- High income – High earners are much more likely to be audited, especially those who earn more than $200,000. This is because high income earners often have more investment income (such as capital gains, real estate transactions, and stock options), which involves more complex tax reporting. The IRS is also more incentivized to audit high income earners as they stand to collect more money in owed taxes, penalties, and interest.
- Self-employment or independent contractor work – Tax returns for independent contractors and self-employed individuals tend to be more complicated than those of employees, which increases the chance of an audit. For example, self-employed taxpayers often claim deductions for expenses related to their work. Self-employed people and contractors should keep meticulous records so they can more easily settle disputes if they do get audited.
Although there is no sure-fire way to prevent being audited, there are certain measures that taxpayers can take to reduce their risk. Accuracy should be prioritized above all else, as even if you do get audited, you will be able to resolve the matter quickly by proving that your return was accurate. Consider working with tax professionals, such as a CPA and tax attorney, to ensure that your returns are accurate and minimize your risk of getting audited.
Some ways to reduce the risk of being audited by the IRS include:
- Avoid overestimating amounts for donations.
- Double check to ensure all math is correct before submitting a return.
- Make sure to report all taxable income and avoid under-reporting.
- Do not claim excessive and inaccurate deductions for home office expenses.
Taxpayers who have been audited should consider following these steps:
- Gather documents – Audits typically request additional documentation to verify certain aspects of a tax return. An Internal Revenue Service letter will request specific documents, such as receipts, bills, loan agreements, employment documentation, and legal documents.
- Respond quickly – IRS notices include response deadlines. Taxpayers should respond to the IRS as soon as they can, as delays can cause additional interest to accumulate.
- Request more time, if necessary – If it is not possible to respond to the IRS before the deadline, contact them and ask for more time. The IRS will often grant 30-day extensions for those who need more time to provide what has been requested.
- Consider seeking professional guidance – Some audits can be resolved quickly and without complication, such as a case where receipts simply need to be provided. But for more complex audits, consider seeking legal guidance from an experienced tax attorney.
- Pay as soon as possible – Taxpayers who owe money at the end of the audit or after filing an appeal should pay their debt as soon as possible to avoid additional penalties and interest. Those who are unable to pay should attempt to negotiate for a payment plan with the IRS or another payment measure, such as an offer in compromise.
If you have recently been audited and have questions about how to proceed, the team of experienced Mississippi tax attorneys at Damiens Law is here to help. An IRS audit attorney can review your case and help you determine how best to handle the situation. Contact Damiens Law today at (601) 957-9672 to learn more in a free consultation.