May 31, 2021
A recent article in Forbes summarized a lot of our thoughts on IRS Audits. We would like to take the chance and publish it without amendments.
According to the Internal Revenue Service (IRS), about 850,000 tax returns were audited for 2015, which was the most recent year for which it’s published data. That is about 1% of all tax returns filed. And while those with higher incomes (above $500,000) had a greater chance of being audited, about 300,000 low-income tax return filers who claimed the earned income tax credit, which is a refundable tax credit and can reduce the amount of taxes you owe and generate a refund, were audited.
And chances are, audits may increase in the near future. President Biden’s American Families Plan is expected to give the IRS $80 billion over the next 10 years to increase audits of high-income earners and corporations. This increase is expected to yield more than $700 billion of revenue over the same period.
The IRS can audit you for many different reasons. This may include failing to report income previously reported to the IRS or if your return raises red flags, such as a large deduction compared to your income reported.
Additionally, if your tax return has a high Discriminant Function System (DIF) score— a score that provides the likelihood your return has audit potential based on the IRS’ prior experience with similar tax returns—you’re more likely to be audited.
But whatever the reason, here are a few ways to prepare if the IRS comes knocking.
Obtain the Requested Documents or Seek Out Third-Party Sources
The IRS will send you a notice once your tax return undergoes the audit process. In most cases, you may receive Notice 566S, which provides a list of required records you will need to submit to the IRS concerning a specific deduction or income item.
The IRS requires you to keep your documents as long as needed to prove your deductions on the tax return. For instance, while the IRS typically requires you to keep your records for up to seven years, if you own a property you are required to keep records on that property until you dispose of it in a taxable transaction, such as a sale.
Generally, the best practices for taxpayers are to keep a receipt for everything and consider backing up your records to the cloud, says Edward Karl, vice president of taxation with the American Institute of Certified Public Accountants (AICPA). He also suggests working with a reputable tax professional, like a certified public accountant (CPA) even before an audit, since they would be more likely to inquire about your records and receipts.
If you did not keep the appropriate documentation, there are still alternate options. Consider this scenario: You are an independent traveling nurse and work for an agency, but do not have a copy of your mileage records for the year. You can contact your agency and request your work assignments for the year to recreate your mileage log. You can then use that information to prepare a spreadsheet, use an online mileage tracker and then determine your total miles driven. These recreated documents can be submitted to the IRS to prove your expenses.
The IRS also allows you to recreate missing documents to prove tax items on your return in case of a disaster that left your original documents missing or destroyed, Karl says.
Get Help from a CPA or Tax Professional
While you can represent yourself during an audit, it may not be in your best interest. Since the tax code is complicated, lengthy and always evolving, seeking a tax professional during an audit is helpful, says Alton Bell, II enrolled agent (EA), founder and principal accountant of Bell Tax Accountants & Advisors based in Chicago.
“Tax professionals can be the key facilitator that can coordinate and advocate in good faith on your behalf. ” says Bell.
The advantage of obtaining a representative is that this person can negotiate and advocate your position with the IRS on your behalf. This means you do not need to speak with the IRS during the course of your audit. Your representative would need to complete Form 2848, Power of Attorney or Declared Representative. He or she must be authorized to practice before the IRS. Authorized individuals include attorneys, CPAs, enrolled agents and other professionals.
Karl says your representative can help decipher the correspondence you may receive, help you understand the IRS’ questions, and help you recreate records where there may be missing records.
Resolve or Appeal Your Final Audit Outcome
If your audit outcome is not what you expected, you can request a meeting with the IRS examination office to resolve your audit findings. This meeting would attempt to resolve any disputed audit issues. If the office cannot resolve your disputed issues, your case will be forwarded to the Appeals Division.
In most cases, you can request an appeal by filing a written protest and mailing it to the IRS. The IRS needs to receive your protest by the deadline. Generally, the IRS allows you a 30-day timeframe from the date of the letter to make the request.
Bell says the hearing meeting can take place over the phone or in person.
“The meeting is informal and both sides will have an opportunity to present their position, which may take anywhere from an hour to several hours. If additional time is needed to complete the hearing, the appeals officer has the authority to agree to another date to complete the process,” says Bell.
Bell says generally, the IRS Appeals Office seeks to settle to avoid tax court, so you can expect that the IRS officer will be willing to compromise.
Author: Kemberley Washington
Published: May 24, 2021
Original article title: What Should You Do If The IRS Comes Knocking On Your Door?
Newspaper title: FORBES
Accessed: May 31, 2021
Similar blog posts
- "How Can I Save $12,000 A Year?" - October 25, 2021
- The Best Alternatives for Mileage Logging - January 10, 2022
- What to do if the IRS did not accept your mileage log - December 15, 2022
- IRS Compliant Mileage Log - May 9, 2022
- Free MileageWise Live Demo for $12,000 annual tax savings - September 2, 2022