Tap Dancing On The Head Of The Needle: Navigating Audits & Reconsiderations
When I think about audits, I see them as a series of delicate maneuvers that you have to accomplish at the most precarious tipping point. Why? Because, unlike the presumption of “innocent until proven guilty” used by the criminal justice system, IRS auditors operate on a “guilty until proven innocent” basis. In essence, the process looks like this: The IRS reviews your return, identifies concerns, and demands that you prove their assessment wrong. At this point, the IRS holds all the cards. This means that the success of any negotiation hinges on meticulous execution – much like the precision required to tap dance on the head of a needle.
To start, it’s important to engage with an audit proactively, rather than waiting until the last minute. This approach allows us to set the stage for a productive negotiation or determine if the audit is, in fact, valid. By doing so, we can avoid unnecessary disputes and penalties and work towards a favorable outcome.
Identifying Common Triggers For IRS Audits
The IRS seems to operate using a mysterious algorithm – similar to something like the supercomputer HAL from Stanley Kubrick’s classic film 2001: A Space Odyssey. While we can’t comprehend the inner workings of this algorithm, seemingly random red flags tend to trigger audits. For instance, when a tax return appears illogical – showing substantial income with no expenses or vice versa – it’s likely to trigger an audit.
While the exact triggers for an audit remain elusive, most experienced CPAs can spot potential issues and take steps to prevent them. Even still, when a tax return exhibits these conspicuous disparities and fails the “laugh test,” an audit becomes a real possibility.
Navigating An IRS Audit: Initial Steps
Receiving an IRS audit notification can be daunting, but understanding the process and your options is crucial. There are two primary types of audits to be aware of.
- The first type, known as a CP 523 audit, involves responding to IRS determinations through letters. You can reply with documentation directly, enlist the help of your CPA, or engage a tax attorney to respond.
- The second type of audit is more comprehensive and resembles scenes from movies like The Wolf of Wall Street. Auditors schedule meetings to meticulously examine your financial records. In these cases, it’s essential to ensure the auditor stays within the audit’s defined scope to prevent unnecessary expansions.
Auditors are constrained by the audit’s scope, unless they decide to expand it. Protecting your financial privacy is one of your rights and auditors cannot delve into your personal documents without a valid reason. However, having a tax attorney guide you through the process can help assert your rights more effectively. And remember: While it may be tempting to confront auditors aggressively, professionalism usually yields more favorable results. Auditors are, after all, just doing their jobs, and maintaining a respectful tone can often lead to a smoother audit process.
Exploring Tax Audit Reconsideration
Tax audit reconsideration is essentially a second look at your audit after it’s been completed. If you didn’t respond to the initial audit notice or are dissatisfied with the results, you can request reconsideration. However, this process comes with a caveat. Where assessments have already been made, you may have to deal with liens or ongoing collection actions – and managing both the audit reconsideration and collections concurrently can be complex, requiring careful strategizing.
As a business tax attorney, my primary role in audits and reconsiderations is to ensure that the IRS follows its own rules and regulations, ensuring that everything proceeds smoothly and efficiently, with all parties following the necessary protocols. I don’t prepare tax returns or directly defend them during audits; that’s the role of CPAs. However, I work to support CPAs, providing them with legal backing and ensuring they have the information necessary for the audit. Then, if collection actions arise, I help my clients navigate assessments, balances, and penalties that may have been imposed as a result.
Preventing Future Audits
Once you’ve experienced an IRS audit, preventing another one becomes a priority. Most people learn valuable lessons from the challenging process, such as how timely and accurate tax filings are crucial for minimizing the risk of facing an audit in the first place. For this reason, hiring professionals to handle your financial records and tax returns can save you the time, money, and stress associated with the process. Additionally, addressing any issues identified during the audit and implementing necessary changes in your financial practices can help you avoid future audits. While no one wants to face a situation such as this, each audit that occurs provides a valuable roadmap for improving your financial record-keeping and tax compliance, helping you steer clear of audits in the future.