A Taxpayer’s Guide to Undergoing a Tax Examination
The IRS tax audit process is one that every taxpayer should be familiar with, especially if you had self-employment expenses/deductions or received a tax refunds in the past. Even the most simple tax audit, if not handled properly, can result in you owing money to the IRS (including large penalties and interests), and in some scenarios, even criminal fraud charges. This article will briefly outline the IRS tax audit process and provide some insight on what to expect if you are caught in the crossfires of an examination. Nonetheless, it is important that you consult a tax attorney or CPA if the IRS in contacting you.
Pre Examination: Tax Return Selection Process
Generally, the most common taxpayers to be audited are those that have high itemized deductions, unreported income, filed a sloppy/incomplete return, have drastic changes in income, or have a small business or are self employed (with several business deductions). The IRS follows various criteria when selecting tax returns for examination, such as mathematical errors or missing information, but mainly utilizes a computer program that flags returns for audit based on a mathematical formula; this formula varies by taxpayer and tax return and may rely on information from third parties (i.e banks, employers, etc).
The IRS determines the most appropriate method of examination based on the complexity of the tax return. You may be subject to a Campus Examination, the most common examination; an Area Office Examination, for more complex cases requiring proof; or a Field Examination, which is reserved for small businesses requiring more extensive examination, and is generally conducted at the taxpayer’s place of business or at their accountant or lawyer’s firm.
The Examination Process
Once a return is flagged for audit, a notice is issued to the taxpayer to notify them of the pending examination, which may be Form 4564, Information Document Request, or another similar letter/form (such as CP2000, Letter 3572, Letter 3391, etc.). The taxpayer has 30 days to respond to the notice after it is issued, as failing to do so can result in additional penalties. A notice does not necessarily mean that additional taxes are owed, so it is important to understand the content of your notice to determine the appropriate action required. It is at this stage (before the 30 days are up) that is most convenient for a taxpayer to consult with a tax lawyer or CPA for proper guidance or so they can represent you throughout the process with an authorized Power of Attorney.
Regardless of the type of examination or how the taxpayer chooses to handle the tax audit, it is important that the taxpayer is aware of the potential consequences at hand: a missing document or incorrect information relayed to the examiner can result in further examination of the return and past years’ returns, as well as suspicion of fraud in some cases. The taxpayer may also face additional interests and penalties in addition to assessed tax liability. And the IRS can also file a potential tax lien or levy on the taxpayer’s account, which can result on the IRS seizing the taxpayers assets (such as a car or other property) or garnishment of the taxpayer’s wages through their employer. Therefore, it is crucial to either understand the process well or have proper representation.
Failure to Respond to Examination Notices/Letter
Many taxpayers decided to ignore letters from the IRS requesting for documents or a tax audit, especially if the taxpayer believes they (or their tax accountant) made a mistake or don’t have the documents the IRS is requesting. If you fail to respond to an IRS notice or letter on time, the IRS may automatically assess a tax liability and issue another letter stating the amounts you owe. You may also receive a Notice of Deficiency (Letter 531, Letter 3219, etc.) to file a petition with the tax court if you disagree with their assessment, or a similar letter. But even if the taxpayer decides not to contest the assessment in tax court, if the taxpayer cannot pay the full tax liability, the taxpayer’s representative should negotiate the tax liability with the IRS in order to prevent additional penalties or the seizure of their assets.
Once an examination is complete, a letter is issued which formally notifies the taxpayer of the resulting tax examination (this may be Letter 525 or Letter 915 with Form 4549, Income Tax Examination Changes, or a similar letter/form). If the taxpayer agrees to the adjustments made on their return, they will receive a form describing said adjustments and allowing the IRS to collect the agreed amounts. The taxpayer can also dispute/appeal the decision and is given 30 days to protest the examiner’s adjustments. Failure to respond within the 30 day period will result in assessing the original adjustments and issuing a bill to the taxpayer.
If by the end of the examination the taxpayer owes an amount they can’t pay right away, the taxpayer should consider having their attorney or CPA negotiate a payment plan or offer in compromise with the IRS. The taxpayer may also have any previous tax lien released in certain situations.
If you are in need of a tax attorney or CPA, please contact Acosta Tax & Advisory, PA, at 954-239-8365 to schedule a free consultation and discuss your IRS issues.
*This is not official legal or tax advice – please consult a tax attorney or cpa to discuss details about your specific case.