What IRS Auditors Can & Can’t Do to Taxpayers

The IRS has started on its promises to ramp up compliance and collection efforts with not only the big hitters on the tax side of things (high-income individuals, complex partnerships, and large corporations). They are also having the computers search for non-filers, non-paying individuals, and soon with the New Beneficial Owners Information report required of LLCs and Corporations formed by the Secretary of State or Stae Tax Board for hidden non-reported income.

This comes as the result of unbelievably high audit rates among low-income wage-earners taking the earned income tax credit (EITC) –  more than virtually everyone else.

The latter group of taxpayers has historically been targeted not because they account for the most tax under-reporting, but because 1) low-income earners taking the EITC were easy marks in an era when the IRS relied on correspondence audits, and 2) the IRS lacked the resources to assist taxpayers or answer their questions.

Now, with more money to improve technology and more manpower on their side, they’re working hard to shift their efforts to more complex, highly detailed returns.

So, with the IRS Audit and Enforcement team on the prowl for new cases, and, should you find yourself in their crosshairs, knowing their process is going to be optimal for you.

The first step the IRS will take to enforce tax compliance is almost always the audit.

Dealing with an audit, even if only via correspondence, is never fun — nor is it something to be done without effective representation.

That said, there is good news: IRS auditors do not have the final say.

Here’s what I mean…

Before the IRS can finalize an audit, they are required by law to give you rights to dispute it in federal Tax Court and with an IRS appeals officer.

Before any audit becomes final, the IRS must notify you of your rights to dispute it. This letter is called a “Notice of Deficiency.” This notice gives you the right to take the IRS audit to the Tax Court and have an independent judge review it. You will have 90 days to file a petition to the Tax Court after the IRS sends you the notice of deficiency.

And even if those 90 days have already expired, you may still qualify for “audit reconsideration” instead.

Now, before the IRS goes to trial, they typically send your case to an IRS Appeals Officer for settlement. The IRS Appeals Officer’s job is to settle the case based on how a judge might rule, not on how an auditor might rule. As a result, these IRS Appeals Officers have flexibility not always shown by auditors. Most IRS examination cases settle this way, with results not available when only going through the typical audit channels.

You see, Tax Court judges and IRS Appeals Officers perceive cases differently from IRS auditors. If you feel that you are being unnecessarily or over-aggressively audited (and have evidence or can make effective testimony thereof), you can summarize to the Appeals Officer what you will tell the judge. If the Appeals Officer — in preparation for trial — can see that their auditor was being unreasonable, they can often make different kinds of attempts to settle the case in anticipation of how an independent judge might rule.

The auditor often has a small view of your case and does not consider how outsiders would decide it; that changes when the final decision is not in the hands of the IRS, but of the Tax Court.

That said, here is what an IRS Auditor CAN do…

The Tax Law specifically places the burden of proof on you to back up what is on your tax return.

Proving the correctness to an auditor is not easy. The IRS wins over 80% of all audits, often because people are not able to properly verify data on their tax returns. Recordkeeping is the downfall of most audit victims.

Congress gives the IRS broad, but not unlimited powers in auditing. The IRS, in the course of an audit, may:

1. Inspect your business premises,
2. View your home office,
3. Scrutinize your records, and
4. Summon records held by others.

Auditors look for personal expenses disguised as business deductions. With small businesses, the IRS Auditor is always on the lookout for people who bury personal expenses in their business records. Cars, travel, and entertainment are often targets. In these areas particularly, it quite literally pays to keep good records.

In all of this and other instances … well, it’s helpful to have a pro on your side.

If you’re in an audit situation, you don’t have to do it alone. I’m here for you.