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Few words can conjure up that queasy feeling in your stomach more easily than the word "audit". The fact is the IRS conducts millions of audits or examinations each year for various reasons. If you recently received a letter from the IRS and are unsure what the next step should be, then hopefully this article will help inform you of your options.

Why are you being audited by the IRS?

That is question a lot of folks would like the answer to. The IRS conducts millions of audits a year for various reasons. Now, you may be just a victim of a random audit, or you may have been selected because the IRS computers and/or the IRS examiners felt that your IRS tax return likely contains what they call "significant errors". For every 100 or so tax returns filed, the computers at the IRS will kick out approximately 10 for human review. Of those 10, 1 will likely be marked for audit because something on the return looks strange or out of place.

What type of IRS audit is it?

Although the IRS has several different ways to audit an individual or business tax return, the three main types of audits used are correspondence audit, office or in-office audit, and field audit.

Whether you plan on representing yourself or hiring a tax professional, there are several factors that have to be reviewed and weighed when creating a strategy for your IRS audit.

Some of these factors may include:

• What type of audit has been selected (see above for the 3 types)

• Where the audit will take place (at your place of business, IRS office, etc)

• What is the level of IRS employee that will be conducting your IRS audit

• What specifically is being audited - how broad is the scope

• Are there any other details in your tax returns or financial records that the IRS will find that will cause them to expand the scope of the audit

If you don't feel comfortable representing yourself during an IRS audit, or are not well versed in the procedures, then it is in your best interest to hire a tax professional to represent you. Once represented, you are not even required to be present during the audit. In fact, this can often work in your favor. Another added benefit to having representation is that if you disagree with some of the changes made by the auditor, or the outcome of the audit, your tax professional has the experience and know how to take your case to a higher authority within the IRS.

When faced with an IRS Audit, the one thing you never want to do is ignore the audit letter from the IRS! Failure to show up or comply with an audit, is a sure-fire way to limit your options, create bad will with the IRS auditor, and increase your tax bill.

What about penalties?

It is impossible to talk about IRS audits without touching on penalties & interest. If the IRS determines that you underpaid your taxes they will, at a minimum, make you pay the amount you would have owed. However, it rarely stops there...

In fact, if they do determine that you underpaid, then they will generally start adding the following:

• Failure to pay penalties (up to 25%)

• Interest

• Accuracy related penalties (up to 20%)

• Other related penalties as deemed appropriate

Interestingly, the IRS has an entire chapter of the IRM, the Internal Revenue Manual, devoted solely to penalties the IRS can charge you. The best way to minimize these penalties is to minimize the number of, and the amounts of, the adjustments made by your auditor.

Other Considerations

Also, just a quick note about the Statute of Limitations as it applies to IRS audits. Unless the IRS suspects tax fraud, they can only go back 3 years to audit any return you file (from the date you filed). However, if the IRS does suspect tax fraud, or a gross understatement of your income, then they can go back up to 6 years.

All these factors and more need to be carefully examined and weighed when planning for an IRS audit. Many reputable tax firms offer some form of a free consultation to discuss a prospective client's problems and options, and if you are faced with an IRS audit, you should consider at least speaking with a tax professional over the phone to discuss your options. At a minimum, you will be better informed about your particular situation and possible options.

Jay P. Mangrum is a Sr. Tax Advisor with Houston based Assurance Tax Advisors, a national tax resolution firm specializing in IRS audit representation and tax consulting. For more information on this and other tax topics, visit their website at http://www.assurancetaxadvisors.com.

By Jay P Mangrum
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