Receiving a letter from the IRS, any letter, can be a fear inducing experience. But receiving a letter informing that you are under audit and requesting – nicely at first – that you produce all books and records for the year(s) under review can be particularly devastating.
It’s possible that you contemplated an audit for items of tax that you anticipated would require additional explanations; but in a more likely scenario, the audit came “out of the blue.” Depending on the list of documents requested by the IRS, the audit can be a narrow one – for one or several tax items of tax for a particular year, or can be broad to include all items of income and expenses.
What happens during an IRS Audit?
The IRS resolves many tax audits by directly communicating with the taxpayer and requesting the books and records via mail/fax to confirm that the tax return for the year under review was accurate and matches the taxpayer’s records.
However, IRS audits for businesses with a large amount of gross income, or hundreds of thousands of dollars in reported expenses, normally require a Revenue Agent’s visit to your place of business. Sometimes, the Revenue Agent will even physically observe your place of business to gauge the amount of income being received and to observe if cash is being recorded in the cash register. If the tax return does not match what the Revenue Agent observes, or if there are other anomalies, the scope of the audit is likely to be expanded to additional items of tax or even prior tax years – for up to six years.
Choosing a tax professional when facing an IRS Audit
When facing an IRS audit, which tax professional to hire, or whether to hire a tax professional at all, becomes a crucial question. Unsurprisingly, the tax professional representing you in the audit can make a huge difference in the outcome – especially if there are concerns that you may have filed a “false return” or engaged in other conduct which can expose you to criminal liability. In such a scenario, it is imperative that you retain the services of a tax attorney (as opposed to a CPA or an EA) to protect your communication under the attorney client privilege.
The difference between Tax Attorneys and CPAs
Simply put, any information that you disclose to your attorney – and you should disclose it all to help the attorney best represent you – cannot be disclosed by the attorney to anyone, nor can it be used against you. On the other hand, disclosing damaging information to a CPA, or anyone else for that matter, can result in that person being a witness against you in a civil or criminal proceeding. Even if you’re not facing criminal liability, retaining an attorney to represent you before the IRS or other taxing authorities can be beneficial because an attorney can prepare the audit for later litigation. Oftentimes, audits do not result in a mutual resolution and litigating the audit is the only option available to achieve the best result. A competent attorney should be preparing for that eventuality, even while representing you before the IRS at the audit stage.
Representing yourself when being audited by the IRS
Representing yourself in an audit, particularly for high dollar returns, is often ill advised. Remember, the auditors are trying to obtain information from you in an audit to potentially prepare a case against you. They can use the documentation you provide, as well as your statements, against you – leading to penalties of up to 75% or even criminal prosecution. Moreover, taking advantage of your procedural and substantive rights can be crucial in an audit. As such, a decision to represent yourself should not be made lightly.
At our taxation practice at Rogoway Law Group, we treat every IRS audit as unique and make strategic decisions after learning about the client’s business and background. Thereafter, we review the client’s books and records to make sure they match the filed tax return, and to determine if there is any civil or criminal exposure. Depending on our assessment of the case, we make decisions about exchanging information with the IRS and about taxpayer’s future interactions with the IRS. Obviously, a case with potential criminal liability is treated with much more sensitivity than a civil case. We understand that going through an audit can be a challenging time. We make every effort to make ourselves available to our clients and work collaboratively with our clients to achieve the best result.