No one ever celebrated receiving a letter from the Internal Revenue Service (IRS) advising of an audit. The IRS has significant power and can impose fines and charge interest on monies that taxpayers should have. The IRS can even have criminal proceedings instituted for certain tax crimes. When you receive an IRS letter, it is important to take it seriously. Talking to an experienced tax attorney can help you answer important questions like “how serious is a tax audit?”. If you received a tax letter indicating that you will be audited, you may want to consider visiting an experienced tax attorney at Damiens Law at (601) 957-9672 to learn all of your legal options.
How rare is a tax audit?
According to a report from the Government Accountability Office, between 2010 and 2019, audit rates for individuals dropped from 0.9% to 0.25%. In 2016 the figure was 0.6%, which indicates that the IRS audited one in 166 returns. It is important to note that the vast majority of these audits were correspondence audits. In a correspondence audit, the IRS sends taxpayers letters in the mail querying one or two issues. This is much less invasive and stressful than an audit where an IRS agent shows up in person for a full audit.
What happens when you are audited by the IRS?
There are four types of tax audits. Each one has its own process and level of severity.
A correspondence audit is the simplest type of audit and is more of a query by correspondence than an audit. The IRS sends a 566 letter that asks for more information regarding information submitted in the tax return. For example, a statement that the taxpayer donated $2,000 to a charity may illicit a call for proof of the donation.
Another example of a correspondence audit would be a CP2000 letter. The IRS sends such a letter when there is a discrepancy between what the taxpayer submitted in the tax return and what the IRS has on record for the taxpayer. The letter would typically propose a negative or positive adjustment to tax obligations. The taxpayer would be required to respond by agreeing or disagreeing. If the taxpayer agrees, they will need to comply with the adjustment. If they disagree, they will be required to state why and send proof of their claim within 30 days of receiving the letter.
As with all correspondence received from the IRS, taxpayers should never ignore it as this can only exacerbate the problem and will see an escalation of the matter on the part of the IRS.
Ignoring an IRS letter could result in penalties, fines, and interest. Typically, a follow-up letter is sent by the IRS advising of the Commission’s decision. There is an appeal process if a taxpayer disagrees with the IRS findings.
An office audit letter advises a taxpayer to attend the IRS office in person in order to clarify the tax data provided. These IRS letters can often be prompted as a result of numerous deficiencies that a mere correspondence audit cannot address. If the IRS sends you such a review invitation, it would be an excellent time to consider getting IRS tax audit representation. The experienced tax attorneys at Damiens Law can help answer your questions and ensure your legal and financial rights remain protected during the tax audit.
In this audit, the IRS agent attends the taxpayer’s place of business for a face-to-face meeting. If stock is maintained, the agent may wish to see the physical inventory and compare it to the records. In addition, questions about the business will be asked and recorded.
Field audits are the most intrusive and comprehensive, and IRS revenue agents usually are highly skilled. These IRS may request financial records, stock assessments, and employee interviews to get a general feel for the scope and financial health of the business. In addition, they may need to see what financial and internal procedures and controls are in place.
If the taxpayer is an individual and not a company, the IRS interview will probably consist of a review of the financial records and a general discussion with the taxpayer. An audit could take a few hours to a week or even more. This would depend on the complexity of the queries. If you are facing a field audit, consider visiting with an experienced tax lawyer to get questions to all of your questions.
Taxpayer Compliance Measurement Program (TCMP) audit
Every year the IRS conducts audits of a randomly sampled 50,000 people or companies to update data on compliance held by the IRS. This audit involves a complete audit with full proof required of all documentation and is a significant comprehensive audit. This type of audit can be overwhelming and legally complex. Some of these audits result in the imposition of fines and the IRS ordering additional taxes to be paid.
What happens if you owe money after the audit?
If the taxpayer is found to owe taxes, the IRS will advise them that they must pay the outstanding tax and the interest that accumulated on the outstanding amount. In many cases, the IRS is open to a payment plan so taxpayers can pay off the money over time. It may be possible to approach the IRS for an Offer of Compromise. The offer, if agreed to by the IRS, allows taxpayers to settle tax debt for less than the total amount owed. The IRS may grant this at their discretion, where taxpayers cannot pay their entire tax liability, or to do so would create financial hardship.
Can you go to jail following an IRS audit?
The IRS audit itself will not result in the taxpayer going to jail. Instead, the vast majority of cases are settled through payment of the tax and penalties, an offer of compromise, or a payment plan. However, for more severe cases, the audit results in the eventual conviction of an accused after a trial for fraud or tax evasion. However, this is a rare occurrence. Even if a taxpayer is found guilty, they will still most probably be punished with probation or payment of a fine. Jail time is not the most likely outcome.
But Really, How Serious is a Tax Audit?
With each type of audit outlined above, there could be an imposition of fines, interest, and additional tax amounts to be paid. In severe cases of alleged fraud and criminal activity, there may be criminal charges and possible jail terms. If you are facing serious consequences as a result of an IRS audit, consider visiting with an experienced tax attorney to learn more about your legal options.
How to dispute an IRS audit finding
If the taxpayer feels the IRS has made a mistake — either in their understanding of the law or the facts of the case — the taxpayer has the right to appeal their decision. There are three methods to dispute an IRS audit finding.
Formal written protest appeal
If the taxpayer intends to appeal, they should not sign the IRS audit report. To sign would be to agree with the findings. The taxpayer has 30 days to file an appeal. The taxpayer can submit a written audit protest appeal by sending the IRS a letter of protest within 30 days of getting the audit report.
Request a small case appeal
Taxpayers can use a small case request as an appeal in cases where the amount owed is less than $25,000. This is a less formal way of appealing. The taxpayer fills out and submits Form 12203 within 30 days of getting the audit report.
Obtaining innocent spouse relief
A married couple is obliged jointly to ensure that the tax returns are accurate. However, where one spouse is unaware of incorrect taxes, the innocent spouse can apply for innocent spouse relief. This will not protect any joint income received but will prevent individual income and self-employment taxes from becoming embroiled in the tax issue.
Contact an experienced tax attorney to learn more
The easiest way to experience an IRS audit is to report your taxes fairly and pay your taxes in full and on time. If discrepancies are discovered and you agree with the IRS audit that you owe taxes, it is often a good idea to make the appropriate and legally required payments.
However, if you are facing any type of tax audit, you should consider visiting with an experienced tax attorneys that can help explain your legal rights and obligations regarding tax-related issues. If the IRS is auditing you, or you need to prevent your assets from being seized, Damiens Law can help answer your questions and provide you with all of your legal options. Contact our dedicated legal team today at (601) 957-9672.