How to Respond to Threats of IRS Prosecution From Auditors

How to Respond to Threats of IRS Prosecution From Auditors

Dealing with an IRS audit can be an intimidating and stressful experience. Many taxpayers panic when they receive an audit notice in the mail, immediately assuming the worst. However, it’s important to stay calm and take the proper steps to respond to an IRS audit letter.

First things first: take a deep breath. Just because you’re being audited does not automatically mean you’re in trouble or will face prosecution. Many audits are routine and focus on verifying information. With the right approach, you can get through the audit process smoothly.

Don’t Panic – It’s Usually Just Routine

Audits are actually pretty common: the IRS conducts over 1 million audits each year^[1]. Many are fairly routine and not necessarily an indication of suspected wrongdoing. Reasons for an audit include:

• Random selection
• Data matching issues where your return doesn’t match info the IRS has
• Unusual deductions or business losses claimed
• High income reported

So take a deep breath – this may just be a standard inquiry to verify some information on your return. Don’t immediately assume you’re facing prosecution.

Gather Your Records

Now it’s time to get organized. Pull out your prior years’ tax returns and gather any documents, receipts, invoices, etc. related to the deductions or income the IRS may be questioning. For example, if they are auditing unreimbursed employee expenses, get your mileage logs, receipts for supplies bought, proof of required uniforms, etc.

Make copies of everything, including the audit notice. Organize records neatly so you can efficiently respond to any requests for documentation. Having your paperwork in order shows you’re taking this seriously and have nothing to hide.

Understand Your Taxpayer Rights

It’s important to understand your rights as a taxpayer during an audit. Some key rights include:^[2]

• The right to professional and courteous service from IRS employees.
• The right to representation, including having a tax pro accompany you to any interview.
• The right to know why you are being audited and what specific issues are being reviewed.
• The right to receive a copy of the audit report explaining the IRS findings.
• The right to appeal audit decisions you disagree with.

Knowing your rights will help ensure you are treated fairly during the process.

Respond Promptly

It’s crucial to respond to the audit notice as soon as possible, either with a phone call or written reply. This shows you received the notice and are cooperating fully. Failure to respond can lead to immediate assessment of tax owed and penalties.

If you received the notice by mail, you can request more time to respond if needed. Simply fax a written request to the number on the notice asking for an extension.^[3] But don’t delay too long – respond within 2-3 weeks at most.

Request a Face-to-Face Audit

For complex audits, consider requesting a face-to-face meeting with the auditor rather than just replying by mail. This allows you to explain deductions, ask questions, and avoid potential miscommunications. You can bring your documentation to the meeting and walk the auditor through it.

Having a tax professional accompany you to the meeting is highly recommended. They can help explain any complicated tax situations and ensure your rights are protected.

Be Cooperative and Transparent

Cooperating fully with reasonable requests shows good faith. Avoid being combative or overly defensive, as this can raise red flags. Supply requested documents promptly and answer questions honestly. Explain anything that may have been confusing on your return.

If additional tax is owed, don’t try to conceal it. Come clean right away and make arrangements to pay. This can help avoid more serious penalties down the road.

Don’t Miss Deadlines

Make sure to meet any deadlines the IRS gives you to supply added documentation. Missed deadlines can lead to immediate assessment of taxes owed. If you need more time, request an extension in writing.

If you received a Notice of Deficiency giving you 90 days to challenge the findings in Tax Court, pay very close attention. Missing this deadline prevents you from disputing the liability in court before having to pay.^[4]

Consider Getting Professional Help

Having an experienced tax pro assist you through the audit can make the process far less stressful. Unless it’s a very minor, straightforward issue, professional help is highly recommended.

A tax lawyer can communicate with the IRS on your behalf and defend your return. An Enrolled Agent has extensive audit experience and can explain deductions and complex issues. A CPA can analyze your records to proactively address any trouble spots.

Interview a few professionals and choose someone you feel comfortable with. Fees vary based on complexity. Many offer fixed-fee audit representation to help control costs.

Appeal Audit Findings You Disagree With

If additional taxes or penalties are assessed after an audit and you disagree, you still have appeal rights. You can request an appeal by:^[5]

• Calling the IRS number on your notice
• Explaining specifically why you disagree with the findings
• Stating you want to appeal the decision

New documentation supporting your position can be presented. An appeals officer outside the audit division will review your case. Most appeals lead to at least some reduction in taxes owed.

Don’t Immediately Agree to Audit Findings

When presented with audit findings you disagree with, don’t just automatically sign Form 870 accepting them. This waives your right to appeal.^[6] You can politely decline to sign if you want to preserve your appeal rights.

By sending a formal protest letter within 30 days, you can have your case heard by the Appeals division before paying. Outline specifically why you disagree with the audit findings in your protest letter.

Getting Through It

While an IRS audit notice can be unsettling, carefully following these steps will help you get through the process as smoothly as possible. Stay calm, get organized, know your rights, and consider professional assistance for more complex audits. Cooperate fully and be prepared to appeal any disputed findings. With the right approach, you can resolve the issue and put the stress of an audit behind you.

References

[1] https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits

[2] https://www.irs.gov/pub/irs-pdf/p1.pdf

[3] https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits

[4] https://atltaxlawyers.com/what-to-do-when-you-receive-an-irs-audit-letter/

[5] https://www.irs.gov/appeals/preparing-a-request-for-appeals

[6] https://www.cobar.org/For-the-Public/Legal-Brochures/How-To-Deal-With-And-Survive-IRS-Income-Tax-Audits