Audit Help

Don't face the IRS alone

An IRS audit is an investigation in to a tax return. The IRS relies on taxpayers "voluntarily" reporting their income on a tax return. Each year the IRS picks a number of returns to audit so they can double check if the taxpayer reported all of their income and to see if they followed the law properly.

An IRS audit is invasive and complex. Audits are the only time where the government can show up without a warrant and say show me everything you have. If selected for audit, a taxpayer has to hand over all of their financial information. They have to turn over their bank statements, credit card statements, and other receipts. They have to show the IRS the complete inner workings of their business. Taxpayers have to prove to the IRS that the returns were correct and the process can feel like you are guilty until proven innocent. A short audit can last over a year. Many times audits last several years if you can't agree with the IRS findings.

Helping clients under audits is one of the reasons I became a tax lawyer. The system is only fair if you have good representation. I know what you are required to give the IRS and what you are not. I know how to talk to the auditor. I know how to argue the law. I can interact with the IRS so you don't have to. Most importantly I take the stress off of you and may be able to save you money.

What is a tax audit and why did I get picked?

There are many reasons why a taxpayer is selected for audit. It could have been something as simple as you deducted more car expenses than average. Other times the IRS may have picked you based upon a computer-generated "dif score" that estimates if you underpaid your taxes and by how much. Why you were picked does not matter as much as what the IRS is going to do next. During the audit, an IRS Revenue Agent is going to independently verify how much income you made, and if your deductions are justified. Audits are standardized in order to make sure that a taxpayer’s return is substantially correct and so the IRS can compare the result to other taxpayers.

At the start of every audit the IRS will begin by conducting a bank deposit analysis. A bank deposit analysis is where the IRS adds up all of the deposits made during the year to determine what your income actually was. They may also ask for other documents such as a general ledger to check for unreported cash payments.

Double checking your income is only part of an audit. Often what increases the tax due is not extra income but expenses the IRS does not allow. For example if the IRS decides that your new $2000 computer was personal and not a business expense, your income can go up $2000 and you may owe $500 in additional tax if you are in a 25% tax bracket. Often the line between what is personal (non deductible) and business (deductible) can be difficult to understand. If you leave it up to the IRS they will most likely find that an expense was personal and that you owe tax.

How much trouble am I in?

Many audits are like going to the dentist. You dread going through them but it is not the end of the world. In fact studies show that many taxpayers forget they were even audited after a couple of years. If you are normal employee and have your wages reported on a W-2, chances are that any changes the IRS makes will only amount to a few hundred dollars and it will be cheaper and easier to pay it and move on.

If you are an independent contractor or a business owner an audit poses more risk. As a business person you have to make judgment calls about what you business needs and what to spend money on. Since the IRS auditor is not a business owner they may not see things the same way. The IRS is likely to disagree with your decisions and will tell you how run your business. If the disagreements are large enough you need someone to stand up for you.

There are special situations where you may potentially have a very large change to you tax bill or even potential criminal charges. Some of these are:

1.You are a small business owner who sometimes pays personal expenses out of the business or you have expenses that are part personal and part business use,
2. You are a small business owner who did not keep very good records,
3. If you are paid in cash, or pay workers in cash,
4. If you are a business owner or manager and the business has fallen behind on paying employment taxes, or
5. If you have foreign bank accounts that you haven’t reported to the US Government.

In any of these situations you may have a serious problem that needs to be addressed head on. The best thing you can do is hire someone early on in the audit.

How do I help clients with tax audits?

During an audit I do two things, help you gather information and tell your story and how it relates to the tax code.

Every IRS audit requires documentation. As CPA’s like to say “no documentation no deduction”. However when the IRS ask for documents they don’t ask you in plain english. I help interpret what the IRS is asking for and help you put your documents in context. For example, if the IRS auditor ask for documents about a business trip, it is not enough to just send the receipt for the airplane ticket. You have to know that when you give the auditor a receipt, you also have to give them an explanation. If you don’t tell the IRS auditor why you went and how it relates to your work they may deny it. If the expense is questionable often I have to cite the Internal Revenue Code or Tax Court cases and how they support your treatment. If you just give the IRS auditor what they ask for often you get the same result as if you had given them nothing at all.

If the expense could be both personal or business telling your story, and how it fits into the law, becomes even more important. The IRS wants revenue and it is up to you to convince the auditor you are right. Often I find that taxpayers already know their own story, but don't make any effort into teaching the IRS about their business. This can be an expensive mistake and is one of the many reasons I can usually save my clients tens of thousands of dollars during the course of an audit even after taking my fee into account.

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