Tax Relief Blog
What to Do When You Receive an IRS or State Audit Notice and How an Enrolled Agent Can Help
Receiving an audit notice from the Internal Revenue Service (IRS) can be a daunting experience for any taxpayer. However, understanding the audit process and knowing your rights and options can significantly ease the stress. This article will delve into the intricacies of IRS audits, outline the steps you should take upon receiving an audit notice, and explain how an Enrolled Agent (EA) can represent and assist you throughout the process.
What is an IRS Audit?
An IRS audit is an examination of your tax return to verify that your income and deductions are accurate. The IRS conducts audits to ensure compliance with tax laws and to maintain the integrity of the tax system. Audits can be conducted through correspondence (by mail) or in-person (at an IRS office or your place of business).
Types of IRS Audits
Correspondence Audits: These are the most common and are conducted by mail. The IRS will request additional documentation to support specific items on your tax return.
Office Audits: These audits are conducted at an IRS office. You will be asked to bring specific documents for review.
Field Audits: These are the most comprehensive and are conducted at your home, place of business, or your tax professional’s office. The IRS will review your financial records in detail.
Steps to Take When You Receive an Audit Notice
1. Read the Notice Carefully
The first step is to carefully read the audit notice. The notice will specify the type of audit, the tax year in question, and the items being examined. It will also provide instructions on how to respond and the deadline for your response.
2. Gather Documentation
Collect all relevant documents that support the items being audited. This may include receipts, bank statements, invoices, and other financial records. Ensure that your documentation is organized and complete.
3. Respond Promptly
It is crucial to respond to the audit notice by the specified deadline. Failure to respond can result in penalties and additional taxes. If you need more time to gather documentation, you can request an extension from the IRS.
4. Consider Professional Representation
Navigating an IRS audit can be complex and time-consuming. Consider hiring a tax professional, such as an Enrolled Agent (EA), to represent you. An EA is a federally authorized tax practitioner who can represent taxpayers before the IRS.
What to Do When You Receive an IRS or State Audit Notice and How an Enrolled Agent Can Help
How an Enrolled Agent (EA) Can Help
1. Expert Knowledge and Experience
Enrolled Agents are tax experts with extensive knowledge of tax laws and regulations. They are required to pass a rigorous examination and complete continuing education courses to maintain their credentials. An EA can provide valuable insights and guidance throughout the audit process.
2. Representation Before the IRS
An EA can represent you in all matters before the IRS, including audits, collections, and appeals. They can communicate with the IRS on your behalf, ensuring that your rights are protected and that you receive fair treatment.
3. Preparation and Organization
An EA can help you gather and organize the necessary documentation for the audit. They can review your financial records to ensure that everything is in order and identify any potential issues that may arise during the audit.
4. Negotiation and Resolution
If the IRS proposes changes to your tax return, an EA can negotiate on your behalf. They can present evidence and arguments to support your position and work to resolve any disputes. If necessary, an EA can also represent you in appeals or tax court.
Detailed Steps in the Audit Process
1. Initial Contact
The IRS will send you a letter notifying you of the audit. The letter will outline the items being examined and provide instructions on how to respond. It is essential to read the letter carefully and follow the instructions.
2. Documentation Request
The IRS will request specific documents to support the items being audited. This may include income statements, expense receipts, bank statements, and other financial records. Ensure that you provide all requested documents promptly.
3. Review and Analysis
The IRS will review the submitted documents and analyze the information. They may request additional documentation or clarification if needed. An EA can help you respond to these requests and ensure that your documentation is complete and accurate.
4. Audit Findings
Once the IRS has reviewed all the documentation, they will issue a report outlining their findings. The report will detail any proposed changes to your tax return and the reasons for those changes. You will have the opportunity to agree or disagree with the findings.
5. Agreement or Disagreement
If you agree with the IRS’s findings, you can sign the agreement form and pay any additional taxes owed. If you disagree, you can provide a written explanation and supporting documents to contest the findings. An EA can help you prepare your response and present your case to the IRS.
6. Appeals and Tax Court
If you are unable to resolve the audit at the initial level, you have the right to appeal the decision within the IRS. An EA can represent you in the appeals process and present your case to an independent appeals officer. If necessary, an EA can also represent you in tax court.
What to Do When You Receive an IRS or State Audit Notice and How an Enrolled Agent Can Help
Rights and Responsibilities During an Audit
1. Right to Representation
You have the right to be represented by an authorized representative, such as an EA, during the audit. Your representative can communicate with the IRS on your behalf and ensure that your rights are protected.
2. Right to Privacy and Confidentiality
The IRS is required to respect your privacy and confidentiality during the audit. They can only request information that is relevant to the audit and must keep your information confidential.
3. Right to Know Why the IRS is Asking for Information
You have the right to know why the IRS is requesting specific information, how they will use it, and what will happen if you do not provide the information.
4. Right to Appeal
If you disagree with the audit findings, you have the right to appeal the decision within the IRS and, if necessary, take your case to tax court.
5. Responsibility to Provide Accurate Information
You are responsible for providing accurate and complete information to the IRS. Ensure that your documentation is organized and that you respond to all requests promptly.
Receiving an audit notice from the IRS can be a stressful experience, but understanding the audit process and knowing your rights can help you navigate it successfully. By responding promptly, gathering the necessary documentation, and considering professional representation from an Enrolled Agent, you can ensure that your audit is handled efficiently and fairly.
An Enrolled Agent can provide valuable expertise and representation, helping you to resolve any issues that arise during the audit and ensuring that your rights are protected. With the right approach and support, you can successfully navigate an IRS audit and achieve a favorable outcome.
What to Do When You Receive an IRS or State Audit Notice and How an Enrolled Agent Can Help
Types of IRS Audits
The IRS conducts several types of audits to ensure compliance with tax laws. Here are the primary types:
Correspondence Audit:
Description: This is the most common type of audit and is conducted through mail. The IRS sends a letter requesting additional information or documentation to support specific items on your tax return.
Process: You respond by mailing the requested documents to the IRS. If the IRS is satisfied with the information provided, the audit is concluded. If not, further correspondence may be required.
Office Audit:
Description: This audit is conducted at an IRS office. You are required to bring specific documents and records to the office for review.
Process: The IRS will review the documents and ask questions about the items under examination. The audit can be resolved during the meeting or may require additional follow-up.
Field Audit:
Description: This is the most comprehensive type of audit and is conducted at your home, place of business, or your accountant’s office.
Process: An IRS agent will visit the location to examine records and ask questions. This type of audit is usually reserved for more complex tax returns or when large amounts of money are involved.
Taxpayer Compliance Measurement Program (TCMP) Audit:
Description: This is a detailed audit where every part of the tax return is examined. It is used primarily for research purposes to update the IRS’s data on taxpayer compliance.
Process: The IRS will request extensive documentation and review every line item on the tax return.
The Appeal Process
If you disagree with the results of an IRS audit, you have the right to appeal. Here’s a detailed look at the appeal process:
Requesting an Appeal:
Initial Steps: If you disagree with the audit findings, you can request a conference with an IRS manager. If the issue is not resolved, you can file a formal appeal.
Documentation: You will need to submit a written protest if the amount in dispute is more than $25,000. For disputes of $25,000 or less, a small case request can be made.
What to Do When You Receive an IRS or State Audit Notice and How an Enrolled Agent Can Help
Appeal Within the IRS:
Independent Office of Appeals: Your case will be reviewed by the Independent Office of Appeals, which is separate from the IRS office that conducted the audit. This office aims to resolve disputes without litigation.
Conference: Conferences with Appeals Office personnel can be conducted in person, through correspondence, or by telephone. You or your authorized representative should be prepared to discuss all disputed issues.
Alternative Dispute Resolution:
Fast Track Mediation: This program aims to resolve disputes quickly with the help of a mediator.
Fast Track Settlement: This is available for certain large or complex cases and involves a streamlined process to reach a settlement.
Post-Appeals Mediation: If you are unable to reach an agreement during the initial appeal, you can request post-appeals mediation.
Appeal to Courts:
Tax Court: If you disagree with the Appeals Office’s decision, you can take your case to the U.S. Tax Court. This court specializes in tax disputes.
U.S. District Court or U.S. Court of Federal Claims: For certain cases, you may also file a suit in these courts. These options are available if you have paid the disputed tax and are seeking a refund.
Declaratory Judgment: In specific situations, an exempt organization may file for a declaratory judgment.
Field Audit by IRS Revenue Agent
A field audit is one of the most comprehensive types of IRS audits. It is conducted in person by a Revenue Agent (RA) at the taxpayer’s home, place of business, or the office of their accountant. Here is an extensive breakdown of the process and what to expect:
1. Notification and Initial Contact
Notification: The IRS will notify you of the audit via mail or phone. The notification will include the specific items on your tax return that are under examination and the documents you need to provide.
Scheduling: The Revenue Agent will schedule a time and place for the audit. This is typically at your place of business or where your financial records are kept.
2. Preparation
Gathering Documents: You will need to gather all relevant documents, such as financial records, receipts, bank statements, and any other documentation that supports the items on your tax return.
Representation: You have the right to be represented by a tax professional, such as a CPA, enrolled agent, or tax attorney. If you choose to have representation, you must file a Power of Attorney form (Form 2848) with the IRS.
3. Initial Interview
Interview: The audit usually begins with an initial interview. The Revenue Agent will ask questions to understand your business operations, accounting methods, and the specifics of the items under examination.
Tour: If the audit is conducted at your place of business, the Revenue Agent may request a tour of the facilities to better understand your operations.
4. Examination of Records
Review of Documents: The Revenue Agent will review the documents you provided. This includes books and records, annual returns, related returns (e.g., employment tax returns, Form 1099 series), and prior and subsequent year returns.
Verification: The agent will verify the accuracy of the information on your tax return by cross-referencing it with your financial records.
5. Additional Information Requests
Follow-Up Requests: If the Revenue Agent needs more information, they may request additional documents or clarification. This can be done through follow-up meetings or correspondence.
Specialist Assistance: For complex issues, the Revenue Agent may seek assistance from specialists, such as engineers, economists, or other experts.
6. Findings and Adjustments
Preliminary Findings: After reviewing your records, the Revenue Agent will discuss preliminary findings with you. This includes any proposed adjustments to your tax return.
Discussion: You will have the opportunity to discuss and provide additional information or documentation to support your position.
7. Closing Conference
Final Meeting: The audit typically concludes with a closing conference. The Revenue Agent will present their findings and explain any proposed adjustments.
Report: The agent will provide a report detailing the audit findings and any changes to your tax liability.
8. Resolution
Agreement: If you agree with the findings, you will sign an agreement form, and any additional taxes, penalties, or interest will be assessed.
Disagreement: If you disagree with the findings, you can request a meeting with the agent’s manager or file a formal appeal with the IRS Independent Office of Appeals.
9. Appeal Process
Formal Protest: If the amount in dispute is more than $25,000, you must file a written protest. For disputes of $25,000 or less, a small case request can be made.
Appeals Conference: An Appeals Officer will review your case and hold a conference to discuss the issues. This can be done in person, by phone, or through correspondence.
Settlement: The goal is to reach a settlement without litigation. If an agreement is reached, the case is closed. If not, you can take your case to the U.S. Tax Court or other federal courts.
What to Do When You Receive an IRS or State Audit Notice and How an Enrolled Agent Can Help
Key Points to Remember
Documentation: Keep thorough and organized records to support your tax return.
Representation: Consider having a tax professional represent you during the audit.
Communication: Maintain open and timely communication with the Revenue Agent.
Rights: Be aware of your rights, including the right to appeal the audit findings.
