At Damiens law, we often hear the same question from clients: “Should I represent myself in an audit?” The answer to this question will depend on the case, but many people find that they do benefit from legal representation. If you decide that you want an attorney to assist you in your audit, or to help you answer your tax questions, contact our experienced and dedicated tax attorneys by calling (601) 957-9672.
Should I worry about an audit?
After submitting their tax returns, most taxpayers breathe a sigh of relief. However, there is always an underlying fear that the Internal Revenue Service (IRS) could select you for an audit. It is important to understand that while you should not worry about an audit, discovering that you have been selected for one can bring about a great deal of additional work and challenges. If you are selected for an IRS audit, it is important to understand the legal and financial implications of your actions.
Do you need representation for an IRS audit?
There are several reasons why a taxpayer may want to consider legal representative for an IRS audit.
Revenue agents are highly trained
The IRS agents who conduct audits often try to gain more information from taxpayers than is necessary for the audit. This, on top of the stress of being audited, may lead a taxpayer to disclose additional information, whereas it is most helpful to provide only the necessary amount required under the law. Unfortunately, it can be difficult for a taxpayer to judge what the IRS has the right to know and is relevant to the case. Offering too much could even cause the IRS to increase the scope of the audit.
A tax attorney, on the other hand, will be aware of what information the IRS needs and can ensure the taxpayer provides nothing more than they are required to under the law. Experienced tax attorneys use their knowledge and experience to ensure that a taxpayer’s legal and financial rights are protected, whereas a mistake in self-representation could damage the case for the taxpayer.
The IRS audit process can be time consuming
Small business owners and busy professionals may struggle to find the time to complete all the paperwork necessary for a tax audit. If the proceedings take any significant amount of time, the audit could begin to have an impact on other facets of the taxpayer’s life.
Receive guidance for important decisions
Some aspects of an audit can be confusing to taxpayers who lack knowledge of tax law. For instance, the IRS may ask taxpayers if they agree with extending the applicable statute of limitations. An attorney can provide the taxpayer with advice as to whether this would be beneficial, based on factors such as what the extension covers and its length.
Preparation for an interview
The IRS may decide to check the taxpayer’s records without needing to talk to the taxpayer. In fact, an experienced tax attorney may often be able to make the case that interviewing the taxpayer would be unnecessary. Nevertheless, the IRS does sometimes deem that an interview with the taxpayer be a requirement of the audit. In these situations, having legal representation can be beneficial, as an attorney can assist the taxpayer in preparation for the interview. This can ensure the taxpayer only provides pertinent information and can avoid the IRS concluding that the taxpayer is trying to conceal something.
Ask the right questions
In addition to the auditor asking questions, the taxpayer is welcome to request more information from the IRS. However, it can be difficult for taxpayers to know what exactly to ask. A tax lawyer can ask questions on behalf of the taxpayer, such as to find out the reason for the audit and can then create a strategy accordingly.
Taxpayers may want representation in the United States tax court
An audit will either end in the IRS finding nothing (in which case the audit concludes) or in the IRS identifying a problem (meaning the taxpayer is left in arrears). If the IRS claims there is a problem, the taxpayer can simply pay the tax gap and the audit will conclude. However, taxpayers who want to contest the finding in the United States Tax Court will need to prove their case. An attorney will know what evidence to provide and how to present this evidence to help the taxpayer present their case.
How will the IRS notify me about an audit?
The IRS notifies taxpayers that they are being audited by letter. In simple cases, the taxpayer only needs to provide the documentation the IRS is requesting by mail. Receiving Letter 566 means the audit will be entirely via correspondence and it may be possible for the taxpayer to gather the necessary information without involving an attorney.
However, either of the other two letters mean the taxpayer will receive a face-to-face audit. Letter 2205-A indicates a field audit, whereas Letter 2572 incurs an in-person visit at an IRS office. In both cases, the taxpayer will need to arrange the appointment. A legal representative can attend the audit, but the taxpayer will most likely also need to be present, unless there is a strong reason for being unable to attend.
Who is likely to be targeted for an audit?
It is important to note that there is nothing random about who the IRS chooses to audit. Businesses and individuals who are selected often have Discriminant Function System (DIF) scores that suggest they have a potential for change (the IRS determines this by looking at similar returns). Taxpayers may also have Unreported Income DIF (UIDIF) scores that indicate potential unreported income.
In addition, the IRS often targets certain types of taxpayers for audits. These include:
- Small businesses that carry out most of their transactions in cash. The IRS will be seeking evidence that the business owner has declared all the cash income.
- Individuals who make a high income — typically more than $500,000 a year.
- Workers whose income changes dramatically from one year to the next (this can be an increase or decrease).
- Schedule C self-employed individuals. In particular, the IRS targets these individuals if it believes they are taking more deductions than they are entitled to. It is crucial to have documentation showing that all claims are legitimate, such as to prove expenses are business related rather than personal. In particular, the IRS may need to inspect the taxpayer’s home office to ensure the individual is using the space exclusively for business activities. Self-employed workers who use their car for business purposes also need to be able to provide evidence that the expenses they claimed were for business and not personal activities. This is possible by keeping mileage logs and showing a calendar of business activities that required transport.
- Business owners making losses for several consecutive years. The IRS may question whether the business is legitimate.
- Anyone who submits a tax return with calculation errors. This can only occur if the taxpayer filed a paper return.
Many of the above circumstances relate to more complicated tax situations, which means it may be more difficult for the taxpayer to prove a lack of fraudulent behavior. However, a tax attorney with experience in the specific kind of case will know what type of evidence to present to the IRS, and help ensure that your legal rights are protected.
What should you not do in an audit?
Whether you decide to represent yourself or work with a tax attorney, there are some things you should never do in an audit.
Submit fraudulent documents
It is a criminal offense to submit fraudulent documents to the IRS, including incomplete paperwork and dishonest information. The consequences of doing this are much harsher than a fine for a tax gap.
Provide more documents than necessary
Taxpayers should also never anticipate what the IRS will want from them and provide additional information. The auditor will specify which documents the taxpayer needs to submit. According to the IRS, these could include:
- Employment paperwork
- Business receipts
- Legal documents
- Loan agreements
- Canceled checks
- Travel logs
- Medical records
- Documentation relating to theft or loss
- Schedule K-1
Be impolite or offer more information than necessary
Although auditors are objective when assessing taxes, improper behavior on the part of the taxpayer could influence the outcome of the case, especially if it makes the auditor suspicious. For this reason, taxpayers should remain professional when interacting with taxpayers. At the same time, they should keep their answers succinct and avoid volunteering any additional information (no matter if it is unrelated to taxes). Making an offhand comment could lead the IRS to take the audit in a new direction.
Provide original documents
It is critical that taxpayers only provide copies of their documents. It is likely that the IRS will keep the paperwork once the audit is complete, which could mean many months of requesting documents back if the taxpayer submits originals.
Should I represent myself in an audit?
We understand that you may have the question, “Should I represent myself in an audit?” In an audit, an IRS agent will scrutinize your finances in detail. An experienced tax lawyer will know how to ensure that your legal and financial rights remain protected during an IRS audit.
If you are interested in learning more about how a dedicated tax attorney can help answer your questions, and possibly work with you on your IRS audit, contact Damiens Law at (601) 957-9672.