Individual taxpayers who are under audit by the IRS may attend the audit in person without any assistance from a tax professional. However, this can be a dangerous mistake. Although not officially stated, it is the job of an IRS Revenue Agent to conduct an audit with an eye toward finding additional tax owed. With so many gray areas in tax law, and considering the tax code’s complexity, an individual who chooses to go it alone is a sitting duck. With extensive tax education and experience, the examiner can take a position to find additional tax due on the return. Without the necessary knowledge, the typical individual is powerless to refute the agent’s rationale.
The IRS performs matching functions to reconcile information reported on Forms 1099 and W-2 with information reported on your return. If income reported by you does not meet or exceed amounts reported to the IRS, you will receive either a bill for tax on the difference or an audit notice.
The IRS conducts employment audits to determine whether workers classified as independent contractors are in fact employees.
Issues associated with sole proprietorships are common audit triggers. The IRS has several approaches to achieve an increase in income tax, as well as the assessment of self-employment tax.
Notice CP 2057. A CP 2057 notice informs you that there appears to be an income discrepancy on your return. The notice instructs you to review the return and file an amended return to correct the information, if necessary.
Notice CP 2000. A CP 2000 notice from the IRS proposes changes to your tax return based on information the IRS has received from third party sources (i.e. Forms W-2, 1099-INT, 1099-MISC, etc.) that the IRS believes has not been reported on your return. You typically have 30 days to respond to the IRS with one of three options.
You are allowed to sign an authorization that enables another party to represent you in connection with the Notice CP 2000. The authorization is part of Notice CP 2000, and a separate power of attorney is not required.
The revenue agent will send a letter to you requesting that you phone the agent. At that time, the date, location, and agenda for the first meeting will be set. You have the right to request that the examination take place at a reasonable time and place that is convenient for both you and the IRS. You also have the right to be represented by a tax professional at this meeting.
The best way to prepare for an audit is to put oneself into the auditor’s shoes. Take the perspective that you are looking for anything possible to increase the tax liability on the return. This is an area where a qualified tax preparer can be invaluable. Ask yourself tough questions and be prepared to support any questionable deductions. Make sure any issue raised during an audit is something that has already been considered. If the pre-audit function is performed properly, the actual audit will be more comfortable, and you will be prepared for any negative adjustments. When conducting an audit, the IRS will ask you to present documents to substantiate the income, deductions, and credits claimed on your tax return. The documentation should be organized by year and the type of income or deduction.
The IRS has created a video web page to assist taxpayers with various questions. Go to the IRS website at www.irsvideos.gov.
If you disagree with the IRS proposed changes, you can appeal the results of the examination in one of the following ways.
Any comments made to an IRS employee that could be interpreted as a threat against the employee will be taken seriously and fully investigated. Do not joke around with IRS employees during an examination.
If a return was examined for the same items in either of the two previous years, and no change was proposed to the tax liability, contact the IRS immediately and the examination will likely be discontinued. This policy is in accordance with IRC section 7605(b), which states that no taxpayer shall be subjected to “unnecessary examinations.”
If the return is accepted as filed, the IRS will issue a “no change letter,” and no further action is required.
In an unagreed case, the IRS will issue a “30-day letter.” You are given the option of agreeing with the proposed changes and also given information about protesting and appealing the results of the audit.
If you do not respond to the 30-day letter, the IRS will issue a statutory Notice of Deficiency which allows you 90 days to file a petition to the Tax Court or pay the tax and file a claim for refund.
DISCLAIMER: This article contains general information for U.S. taxpayers and should not be relied upon as the only source of authority. Seek out professional tax, legal, or financial advice from CryptoTaxAudit or from other reputable companies.