PREP STEPS FOR IRS AUDITS
- Request your "Wage & Income Transcripts"* from the IRS examiner for the tax year(s) in question. (More)
- Gather the Notice of Audit.
- Collect your tax return(s).
- Complete the Audit Defense Program to organize your documents.
- Contact Mr. Hopkins in-person, by Skype or Facetime in Colorado Springs or Pueblo to set a consultation.
- Bring all the above documents to the consultation. See you there!
IRS Audit Notices
The IRS has several notices of audit and they appear very similar, as in the examples. And, there are three ways in which the IRS will ask you to respond to them: by mail (Letter Audit), in the IRS office (Office Audit), or at your home or business (Field Audit).
The letter audit is the most benign while the field audit is the most hazardous. An audit is not just an examination of your accounting books - it is a legal process of investigating you.
Some audits are very general investigations & others are specific for a particular item. For instance, the IRS could audit only the alimony payments you deducted on your return by sending you Letter 3541-A.
In any legal process it is best to get legal advice, even if you proceed alone. Because each case is different, there is no form or fill-in-the-blank response to the IRS. We construct a response for you.
It is very important not to confuse an Audit with a Math Error procedure. A Math Error letter is when the IRS records are different than what you reported on your return. An Audit is the IRS legal process of investigation.
The IRS cannot collect from you or take your refunds at this point, so don't worry.
However, the IRS will want to review and copy many of your personal papers. They usually ask for more documents than what they really need so you have to be careful. It is always best to contact a tax attorney prior to contacting the IRS.
Please DO NOT complete any questionnaires for the IRS until you've met with Mr. Hopkins. The IRS questions on Form 11652 are for Self-employed taxpayers & the questions on Form 13825 are for Employees. (See Form 2106 - Employee Business Expenses). What you say in writing WILL be used against you! Please review the list of questions the IRS will ask you in a face-to-face interview and be prepared to answer.
The IRS will look at your Wage & Income transcripts, your bank statements & your lifestyle to determine your income. Information contained in the Wage & Income transcripts is not usually wrong but lacks proof to offset it.
The IRS will add up your Bank Deposits & declare all of them as taxable income unless you can prove otherwise. They also look at your purchases & assets to see if the income shown on your return supports your lifestyle.
However, Income is not usually a controversy in Audits. Instead, the IRS always disputes Deductions that you claim.
The IRS will deny deductions because the evidence is insufficient or improperly organized & they will offer very little explanation for the denial. The issues will be outlined on Form 4549.
You have the duty to present your case in proper order, not just a pile of receipts or an accounting software program. To prove your case you must get titles, insurance, purchase documents, court documents, appraisals, and many other documents verifying every item on your return.
You will be required to prove each element of your case or be rejected. Above all, don't depend on the IRS for advice! Get real advice from a tax lawyer.
Why Taxpayers Lose
People most often lose against the IRS are because of ill-preparation, procedural errors & disorganization. Many people fail to respond properly & lose their cases by default.
Among the numerous forms & documents sent by the IRS, they will also send Publication 3498-A which explains the audit process but it doesn't explain how to organize & present your evidence.
The IRS also produces an "Audit Techniques Guide" with industry-specific references with advice to IRS agents in an audit. This will show you vaguely what the IRS wants but they aren't allowed to help you present your case. If you haven't responded correctly the IRS will send you reminder letters. (See Letter 5042 & Letter 5262)
So, to win you must prepare your case thoroughly and for the least cost and effort. The IRS often expands their investigation beyond necessary limits.
That's why we designed the TaxHelpLaw.com website - to empower you against the IRS! Learn how to present your case to your advantage.
Often, people are fearful of an audit because they didn't keep their records or the records are lost or unavailable. However, unless you dealt solely in cash, bank records & credit card records can be re-created. Even if you used a lot of cash, we can get affidavits or use industry standards to arrive at a reasonable figure. See Lost Documents.
When people get audited they often go to their tax return preparer and ask the return preparer represent them. This is natural but very dangerous.
Return preparers and CPA's are correctly used for return preparation and bookkeeping but they are not accustomed to advocacy and they cannot use the Courts to your advantage.
Lawyers are trained to advocate with all legal tools for your benefit. Bookkeepers & CPA's provide the evidence & backup for your case but not advocacy.
So, the optimal approach to your audit would be to have a CPA or TaxHelpReturns prepare your records and an attorney to represent you against the IRS. You gain both advocacy & efficient record-keeping.
Regardless, someone must prepare your documents and files.
Whether you should hire someone to help you depends on how in-depth & risky is your audit. If it is a very minor issue, you could probably do it yourself, with a little legal advice. For audits of any substance, the smartest way is to hire a bookkeeper to tally your books and an attorney to represent you.
Still, costs will be prohibitive.
The least expensive way to handle an IRS audit is to use the TaxHelpLaw.com program to prepare your records yourself. Then, get legal advice from Mr. Hopkins at TaxHelpLaw prior to responding to the IRS.
The advantage of self-preparation is that you understand your business & know where records are located, unlike a CPA or attorney. You can more efficiently perform the task of categorizing & tabulating your case. The TaxHelpLaw.com website shows you how!
You may ultimately decide to hire Mr. Hopkins to represent you or proceed alone but once your records are in order you can make better decisions.
Extension of Time
If you have received a notice but have little time to respond, you may have to contact the IRS examiner to request an extension of time until you can speak with the tax lawyer. They will usually allow you time. See Extension of Time Prep Steps.
The IRS usually has 3 years to audit you. When their time is running out they will likely ask you to sign a consent to extend the time period Form 872. Please do not sign this document without getting legal advice. We generally do not grant extensions to the IRS.
In a Letter Audit, once you have sent your information to the IRS they will respond by asking you for additional time to review your responses by using Letter 3500.
If the IRS doesn't agree with your evidence, the IRS will often send a "proposed" change to your return after the Audit interview. You can immediately Appeal this to the Examiner's manager by using Form 14431 with your evidence clarified & itemized on Form 12661.
Even if you don't choose to immediately Appeal a "proposed" adjustment, you can Appeal the determination within the IRS Appeals process or wait until you receive a Notice of Deficiency to file your case in Tax Court.
But, in all these procedures, you must have your evidence organized or you will lose.
The mailing address to send your response to the IRS is the address shown in the initial Letter 3572, Letter 2205 or Letter 2202 you have received. The address should also be on the Form 4564 or any other letter you received about this particular audit.
If you properly present and prove your case, the IRS will send you Letter 987, Letter 555, Letter 3581, or the new updated Notice CP3581 telling you the successful results of the audit. If they don't agree, they'll send the Form 4549 or Letter 3219, Notice of Deficiency.
Please see the TaxHelp Blog series, "Audit Issues".
*Wage & Income Transcripts are computer-generated IRS records of all the forms sent to them about you from your job, your bank, your mortgage company, etc. The formal name for this document is the Informational Return Master File Index (IRMF) but if you just ask for your Wage & Income Transcripts they will send you the IRMF.