When to Involve a Tax Attorney in an IRS Audit

Receiving a letter indicating you are going to be audited by the IRS is often quite frightening, particularly for a first-time auditor. You want to immediately know how this happened, and whether you need to seek professional advice. Check out this link to understand how IRS audits work.

In this article, we will look at potential causes for audits, the role of the tax lawyer, and communicating requests, so that you have more confidence to take action.

What Triggers an IRS Audit?

Generally, audits can be triggered by ‘red flags’ that are detected by computerized systems employed by IRS. Understanding the most common red flags will allow you to fairly quickly gather your records and respond to the auditor’s request without panicking. Look for quotidian triggers for audits:

• Third-party mismatches (W-2s, 1099s, or brokerage forms) that don’t line up with your return
• A lot of scheduling C expenses or indications of loss related to an income source (now generally II will investigate over a number of years)
• Significantly inflated charitable deductions, casualty losses or unreimbursed employee business expenses to income
• Unreported income (crypto currency, marketplace business, gig economy) on new 1099 forms
• Business activity with large amounts of cash (services such as salons, restaurants, contractors) with not matching deposits
• Any foreign account or asset failing to report income relation to FBAR or FATCA.

Role of a Tax Attorney

The tax lawyer will protect you from making mistakes that are avoidable and present your story in the best light. They will control strategy, communicate with the examiners for you, and keep the audit concentrated on only the right year and one or two issues. Engaging a Charlotte tax attorney can allow the client to preserve attorney-client privilege, unlike most preparers.

A tax lawyer can represent the taxpayer during an IRS audit, narrow untimely and invasive requests, and prepare the taxpayer for interviews. This type of legal tax aid is specifically involved in tax controversy and will know when push back or request their supervisor becomes necessary.

If you want someone locally, you can reach:

Cumberland Law Group, LLC
Fairview Rd, Suite 200, Charlotte, NC 28210

Can You Respond Without Counsel?

Sometimes. If it’s a simple correspondence exam requiring clean documents and an explanation about an obviously missing 1099 or a math error, mailing the IRS your clean documents will be sufficient. If the examiner expands the number of years requested in examination, proposes accuracy-related penalties, or requests an interview, it is safer to have a representative.

An attorney will protect your statements, assist you from offering extra issues, and negotiate deadlines and scope. If the IRS proposes an accuracy-related penalty, the attorney will pursue the penalty abatement due to reasonable cause. If the facts are in dispute, having your legal advocate involved earlier will save time and money in the future.

What Is an Information Document Request (IDR)?

An IDR (usually on Form 4564 – https://www.irs.gov/pub/irs-tege/sample_babs_idr.pdf) is a written list provided by the IRS requesting what it wants and by what date. Treat the requests as projects; read the wording carefully, remember the date, and respond with only exactly what is requested. Be complete, accurate, and concise with your response.

• Understand and confirm the exact year, account number, and time period; ask them to narrow vague or overbroad items.
• Track the due date and request an extension of time in writing to prevent the deadline from lapsing.
• Produce only documents responsive to the request, and index your documents with either a attachment or listing to allow for easy viewing by the IRS examiner.
• Avoid sending originals; send copies and keep a copy of everything you send them.
• If you are asked for information that does not exist or was never created, explain to the examiner why and offer reasonable alternatives, for example summaries or affidavits.
• If the request or timeline becomes burdensome, escalate the issue to the examiner’s manager if necessary and appropriate.

Audit Outcomes and Next Steps

Each audit ends in three different ways:

• The audit is no-change (the taxpayer owes nothing)
• The audit is an agreed change (the taxpayer acknowledges and agrees and pays)
• The audit is unagreed or a path of numerous disagreements exists (the taxpayer is disputing the auditor and initial findings).

If you disagree, you will almost always receive a 30-day letter giving you the right to go to Appeals which resolves a large number of audits and issues currently in the IRS. If it’s not resolved, the IRS almost always issues a Notice of Deficiency (the 90-day letter). You can file a petition in the tax court to preserve your rights before a balance is assessed, usually within 90 days.

If a balance is ultimately assessed, they can recommend and work with an attorney on an installment agreement, penalty abatement, or if the taxpayer qualifies, an offer in compromise. Throughout the process, constant communication and organized records will keep the process manageable, predictable, and much less stressful.