IRS Tax Audit-Preparing your Tax Audit Defense

IRS Tax Audits have the potential to create more serious problems with the IRS if a proper defense is not planned. You have heard the expression, “Fail to plan. Plan to fail”. I say, “Fail to prepare. Prepare for disaster”.  Not being prepared for an IRS audit could end up costing you more money than you could ever imagine. The best IRS help is your ability to prepare your case in advance.

The IRS will send out a letter from a local district office indicating that your tax return for a specific year has been selected for audit. The IRS letter will set an appointment date to meet with a Revenue Agent or a Tax Compliance Officer. This letter will list a number of items to bring to the audit for examination such as bank statements, sales journals, 1099’s issued, business formation documents and proof of specific deductions. What if this list is so large that you can not possibly round up all those documents by the IRS audit appointment date? Call the IRS agent and request a later date. The IRS understands that taxpayers don’t always have all their records readily available and may need to contact the bank for copies of their bank statements. You are in a much better position postponing the IRS audit to a future date that would allow you to show up with all the required documents. Showing up for an IRS tax audit unprepared is a potential train wreck.  Ideally, you want to walk into this IRS audit 100% prepared, confident and ready to defend your income tax return.

In the majority of the cases where I have represented taxpayers before the IRS in an audit, the issues are fact based as opposed to a question of law. Therefore, you don’t need to know the Internal Revenue Code, Tax Court Precedents or the Internal Revenue Manual to walk into this IRS audit with a high level of confidence. You do need to know how to present facts clearly in an organized fashion which is simply preparing exhibits and explanations of what the exhibits represent. For example, if you were a real estate agent that sold residential real estate, the IRS would be mainly concentrating on your Schedule C-Profit or Loss from Business. If for example, you reported $76,533 as gross income, your exhibit would include photocopies of 12 months of bank statements that total $76,533 of deposits. What if you discover when you total your deposits from your bank statements you arrive at $86,533 for deposits which is $10,000 more than was reported on your tax return. In that case, the extra $10,000 in deposits may be a gift from a family member or a loan. Part of your exhibit would include some type of documentation attesting to this fact, such as a copy of the cancelled check from the family member or copy of the loan contract. At that point your first exhibit is solid. You will want to take the same approach with your business deductions. For example if you have advertising expense listed as $1,709, you would prepare an exhibit that included copies of all your cancelled checks, credit card and debit card charges that were paid to your  your vendors. When you come up with $1,709 in advertising expense that exhibit is solid.

One of the most troublesome areas is business mileage. The IRS is aware that many taxpayers do not keep very accurate records when it comes to tracking business mileage. I would bet the farm that if you have a deduction for business mileage the IRS agent will ask to review your mileage log. What if I don’t have one? You can reconstruct a mileage log from your daily planner with Google maps using the driving directions section that will calculate the actual mileage. You may even come up with more miles than you reported on your tax return. If that is the case, can you get credit for the extra miles? Absolutely! This may even put you in refund status. In other cases, you may come up with less miles that would result in you owing additional tax, penalties and interest.

After the exchange of tax information between you and the IRS agent, he or she will make any adjustments in their computer system and generate a print out entitled,” schedule of examination changes” for your signature. Be absolutely sure that you are in full agreement with any changes before you sign this document. Once you have signed this document, you have waived your rights for a redetermination at the IRS of Office of Appeals and the US Tax Court. You do not have to sign that document right then and there. If you feel uncomfortable about some of the adjustments, you may want to take a copy of the examination changes to a tax professional for an opinion. What if you find that after consulting a tax professional you discover that you substantially disagree with the IRS. Then you will want to exercise your right of Appeal which will be the topic of my next post.