Scott Estill, an author, lawyer and speaker who draws on his experience as a former senior trial attorney with the IRS to educate consumers about tax strategies and planning. ScottEstill.com
IRS audit rates are trending downward, but that doesn’t mean you should feel safe—approximately 1.5 million Americans still will be audited this year. In fact, audit risks actually are rising for some. The IRS is paying increasingly close attention to taxpayers who report income in excess of $200,000…who own small businesses or rental properties…and/or who are in professions related to real estate.
If you are audited, the accuracy of the information in your tax return won’t be the only factor that affects how costly and frightening the experience becomes. Things you do or say during the audit process could influence the outcome as well. You probably can guess that it’s wise to respond to audit notices by the deadline and to be polite to IRS agents. But some other savvy audit strategies are less obvious to taxpayers—and even to some tax pros.
Five insider audit tips from Scott M. Estill, JD, who has both worked for the IRS and represented hundreds of taxpayers in audits…
Ask the IRS to provide a written list of the paperwork you should bring to the audit. IRS agents are required to provide this list upon request. Bring only the specifically requested paperwork to the audit. Bringing additional documents could expand the scope of the audit.
Example: An IRS agent requests that you bring receipts for your small business related to 2012 advertising expenses. During the audit, an unrelated deduction on your return catches his/her eye and he asks for documentation of this as well. If you have not brought with you the additional information that he wants, he might choose to drop that line of inquiry—preventing the audit from expanding into that area.
If an agent does ask for something you didn’t bring to a meeting, explain to the agent that you didn’t bring the documents he is requesting because he didn’t ask you to bring them. In theory, the agent could ask you to bring this additional information to a second meeting, but in practice, this is unlikely. Recent IRS staffing cuts have left agents stretched very thin. If an agent doesn’t find major problems with the information you provide during your initial meeting, he probably won’t bother scheduling a second one.
Answer questions, and then shut your mouth. Most taxpayers are nervous when they meet with the IRS, and nervous people tend to talk more than they should. IRS agents are trained to exploit this by asking questions, then remaining silent after the reply in hopes that a long, uncomfortable silence will trick taxpayers into adding details that work against their own interests.
Take a time-out if you realize that you are in over your head. Can’t decide whether to pay a tax professional to help with your audit or go it alone? What most taxpayers don’t realize is that they don’t necessarily have to make this decision before their audit. By law, taxpayers have the right to request a postponement at any time during the audit process for the purpose of seeking a tax pro’s help. Taxpayers who request this postponement typically are given at least a few weeks to find a professional.
Fact-check IRS agents. You are not the only person who doesn’t completely understand all the ins and outs of the tax code—the IRS agent handling your audit may not either. It is surprisingly common for IRS agents to make tax code mistakes during audits. It’s gotten much worse in recent years—because of budget cuts, IRS agents receive a lot less training than they once did. Unfortunately, taxpayers and even tax professionals often assume that IRS agents always know what they’re talking about.
What to do: Before your audit, read all the IRS documents that you can find related to the section of your tax return that is being audited, particularly if you intend to represent yourself in the audit. If the agent says something that you suspect might be incorrect during the audit—claiming that the type of evidence you supplied to defend a deduction was not sufficient, for example—ask the agent to put this in writing, then request an opportunity to further research this point or to consult with a tax professional about it.
Even if the agent won’t delay his decision, you always have the right to appeal—and if tax law truly has been misinterpreted, you have an excellent chance of winning this appeal. For more information, go to IRS.gov and search for IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree.
If there is more than one agent present for your audit, ask each agent about his/her role. Usually a single agent handles an audit. The presence of two or more could suggest that the IRS thinks that there are major issues with your return—why else would it devote so much manpower to you? It might make sense to call an immediate halt to the tax audit so that you can hire a tax professional if you haven’t already done so.
The good news is that the IRS agents present are legally required to disclose their roles to you upon request.
If you are told that one (or more) of the agents is from the IRS Fraud Division, immediately halt the audit so that you can hire a tax attorney. Do this even if you already have a tax preparer assisting you. The Fraud Division’s presence suggests that the IRS is considering bringing criminal charges against you. CPAs and enrolled agents (the highest credential that the IRS awards) cannot offer the “attorney-client privilege” that tax attorneys can. If your case were to go to trial—a possibility if the Fraud Division is involved—CPAs and enrolled agents could be subpoenaed and forced to disclose everything you told them.
If you are told that an extra agent in the room is there simply for training purposes, proceed with the audit. Training is the one multiple-agent situation that does not mean the IRS is paying special attention to your case.
If an IRS audit determines that you owe additional federal income tax, there is a very good chance that you owe additional state income tax as well (assuming that you live in a state that has an income tax). Eventually your state is likely to mail you a notice informing you of the additional tax owed—but it could take months or even years for your state to get around to doing this. This delay is not good for you—because by then, interest charges might have significantly inflated your bill.
Generally, the best option is to minimize interest charges by filing an amended state return and paying any additional taxes as soon as possible following an IRS audit.
Warning: Some audited taxpayers might be tempted to not file an amended state return in hopes that their state will never figure out that they owe this additional money. But the IRS shares the results of its audits with the states, and while it is possible that you might slip between the cracks and never hear from your state, this is uncommon—in my experience, approximately 80% to 90% of taxpayers in this situation eventually do get bills from their states.