Getting audited by the Internal Revenue Service (IRS) is something that just about everyone dreads – even those who accurately filed their taxes. An IRS audit is a stressful experience, and most individuals who receive an audit will be unsure of how to proceed. The appropriate response to an audit will depend on a variety of tax-related factors. An audit should always be taken seriously, as an audited individual may only make their problems worse if they ignore an IRS audit.
For many individuals who have been audited, it may be worthwhile to have their tax situation reviewed by an experienced tax lawyer who can review their tax situation and determine the most prudent way to handle the audit. At Damiens Law, our veteran Mississippi tax lawyers have been helping our clients with IRS audits, asset protection, bankruptcy filings, and other related matters for nearly a decade. Contact us today at (601) 957-9672 for legal guidance on any tax issue.
How to respond to different types of audits
The IRS issues three types of audits: mail audits, office audits, and field audits. The majority of audits are issued through the mail. All types of audits are reviews and examinations of the accounts and financial information of the person or business being audited. The audit is designed to verify that all tax information has been correctly reported according to tax laws and to ensure that the audited entity has reported the correct amount of income. The consequences for ignoring an IRS audit vary depending on the type of audit.
How to respond to IRS mail audits
Mail audits are also known as correspondence audits and typically are only focused on a select handful of items from the tax return. When the IRS sends a mail audit, they are typically requesting proof of a specific part of a tax return, such as a deduction claimed for business expenses or income that might not have been included in the return. According to the Taxpayer Advocate Service of the IRS, mail audits typically involve no more than a few issues.
Mail audits are often easily resolved if the audited party has documentation to prove that the section of the tax return in question was accurate. Providing this documentation is often sufficient to resolve the dispute without the need to meet with the IRS in person. Those who lack adequate receipts or documentation may have more difficulty resolving the matter, but an experienced tax attorney can offer guidance regarding the best way to reach a resolution. In either situation, ignoring the audit is likely to cause preventable problems, such as fines, interest, and penalties.
How should you respond to office audits?
The IRS may issue an office audit if they have tax return concerns that are too large to be handled through a mail audit. Office audits are generally more detailed and complicated than mail audits. They are most commonly issued for issues related to itemized deductions, business profits and losses, and rental income and expenses. Notice for an office audit will be sent by mail and the IRS will request that the audited party visits an IRS office in person.
During the IRS office visit, the audited individual will be interviewed with several questions regarding the issue under investigation. Additionally, the interviewer may ask general questions regarding the individual’s employment, financial situation, and lifestyle. These questions are designed to determine whether there could be other unrelated tax issues that the IRS is not yet aware of, such as under-reported income. Given the serious nature of an office audit, it may be wise to consider speaking with one of Damiens Law’s experienced tax attorneys, who can counsel you prior to an IRS office meeting and act as your representative when dealing with the IRS.
Responding to a field audit
A field audit is the most comprehensive type of IRS audit and these are usually filed against high-wealth individuals and businesses. The scope of a field audit extends beyond the tax return to examine the personal life of the individual being audited. An IRS revenue agent will investigate various aspects of the individual to determine if they accurately reported everything on your tax return. This could include investigating bank accounts and asking the audited party for an explanation of certain deposits or discrepancies between the contents of the bank account and what was reported on the tax return.
The IRS conducts field audits face-to-face at either the home, place of business, or accountant’s office of the taxpayer. During the audit, the representative will thoroughly investigate all tax-related documents and filings at the site and interview the taxpayer. In field audits involving businesses, the IRS representative may also interview employees about business operations. A field audit can be intrusive and should be taken extremely seriously. Most individuals and businesses who are going through a field audit should consider hiring a tax attorney to represent them, as handling the audit incorrectly could have major consequences.
How does the IRS handle ignored audits?
When the IRS issues an audit, they also give the audited party a deadline (typically 30 days) to respond with documentation of the disputed portions of their return. Audited parties have the option to respond or ignore the IRS audit. Here is an overview of possible consequences that may occur after an individual or business ignores each type of IRS audit.
What happens if you ignore a mail audit?
If an individual or business ignores a mail audit, the IRS may:
- Alter the return to make it more accurate according to the information they have. This could include adding income or removing deductions.
- Assess taxes and penalties and send a 90-day letter (or notice of deficiency) regarding them.
- Grant the audited individual 90 days to file a petition with the United States Tax Court.
- If the audited party does not respond after 90 days, the IRS can close the audit and begin collecting owed taxes. The audited party automatically waives their appeal rights at this point.
Consequences of ignoring an office IRS audit
Ignoring an office audit will usually cause additional problems, including taxes, penalties, and interest. Additionally, like an ignored mail audit, the IRS will alter your return, send a 90-day letter, and start collecting owed taxes soon after. The audited individual will also waive their right to appeal the decision of the IRS.
How the IRS will respond to an ignored field audit
Similar to the other two types of audits, ignoring a field audit will prompt the IRS to make changes to the tax return. Everything that the IRS was questioning on the return will be altered to reflect what the IRS views as a more accurate portrayal of the income from that tax year. These changes will be based on the information the IRS has and could result in more taxable income, as well as more taxes collected by the IRS. After the return has been changed by a revenue agent, the IRS sends a 90-day letter and begins collecting the taxes owed, while the taxpayer waives their appeal rights.
What to do if you receive a notice of deficiency from the IRS
When the IRS changes a return to reflect additional income or remove previously claimed deductions, they will send the taxpayer a notice of deficiency (also known as a 90-day letter). This letter informs the taxpayer that an additional taxpayer liability has been assessed and notifies them of penalties and interest.
The taxpayer has 90 days to dispute the proposed tax liability without paying it ahead of time. The tax will only be due once the Tax Court has heard the case and made a ruling. If the taxpayer does not respond within 90 days, they will waive their right to appeal in Tax Court and will only be able to dispute the tax by paying the full amount and requesting a refund. The IRS must consider the refund request within six months before the matter goes to court.
The IRS collections process
Ignoring correspondence from the IRS will not stop the collections process. A response from the audited party is not necessary and the IRS will continue to send notices in the mail regarding upcoming collections actions, including:
- Federal tax liens against properties
- Impending seizures of funds in bank accounts
- Garnished wages
- Seized tax refunds
The IRS will continue to levy these collections methods and penalties until they have collected the full tax debt owed or the taxpayer has reached another resolution.
Contact an experienced Mississippi tax lawyer
If you have been audited by the IRS, it is important to take the matter seriously and attempt to resolve it as soon as possible. While there are some rare situations in which it may make sense to ignore an IRS audit, doing so will cause further complications for most taxpayers. Many tax disputes can be resolved easily without the need of tax lawyers, but more complicated matters can often be taken care of more easily with legal guidance. An experienced tax attorney can ensure that their clients handle the audit in an optimal way based on their unique tax situation and represent their clients in correspondence with the IRS.
For more information about responding to an IRS audit, contact the Mississippi tax lawyers of Damiens Law at (601) 957-9672.