You pick up your mail on a Friday afternoon. There is a letter from the Internal Revenue Service – the IRS! Your heart skips a beat. Blood drains from your face. You think your whole weekend is ruined – anxiety every day!
Dear John & Jane Smith
“Your federal tax return for the period shown above was selected for examination.” Heart drops to your stomach!
The letter from the IRS revenue agent continues: “Please call me before the response date listed at the top of this letter. During our telephone conversation, we will discuss:
Items on your return I will be examining.
- Types of documents I will ask you to provide.
- The examination process.
- Any concerns or questions you may have.
- The date, time and agenda for our first meeting.
You do not feel like you won the lottery; or, maybe you did – unfortunately, the bad kind. The letter explains the issues and preliminary items identified for examination. The letter includes IRS Publication 1, Your Rights as a Taxpayer. The letter even gives you an internet link to watch a video presentation, “Your Guide to an IRS Audit.” The video will help you understand the examination process and will assist you in preparing for your audit.
The letter ends thanking you for your cooperation (you have a choice?) and a friendly “I look forward to hearing from you.”
After sleepless nights on Saturday and Sunday, you call the IRS revenue agent on Monday morning to talk. When you speak with the agent, the date and time for an official appointment is scheduled. The agent will explain the audit and what items on your return are being examined. Later, the agent will send you another letter confirming the appointment, and will include an “Information Document Request” advising what records the agent wants you to provide.
There are different examinations – the mail audit, the office audit and the field audit. This initial-letter process, however, is similar for each different type of audit. The mail audit will request that you to send documents to substantiate a deduction or explain why certain income reported to IRS is not on your return. Simple. You just send the information, and you sit back and hope the IRS is satisfied with your explanation.
For the office audit, you meet with the IRS agent in the local IRS office. You bring the records requested to support the items IRS is auditing.
For the Field Audit, the IRS comes to you. If you have a business and file a Schedule C detailing your business’s income and expenses along with your Form 1040, you can expect, in addition to the audit of your individual income and deductions, an audit of the business income, expenses, assets, depreciation, employees, contractors and W-2s and Forms 1099.
You have the right for a tax professional to represent you during the audit. The best representatives are CPAs, Enrolled Agents and Attorneys experienced in tax controversy matters. Always ensure your representative is qualified in tax controversy matters. Meet and talk with your representative so you may judge the person’s qualifications. I suggest that you do not call the 800-telephone number you see advertised on late night television or the company with zippy ads playing over the radio.
Your representative will meet with the IRS agent, review and provide records requested, and answer questions. The IRS cannot interview the taxpayer if the taxpayer has an authorized representative unless the representative agrees or is non-responsive to the agent’s information requests. It is best if the IRS does not interview the taxpayer.
The IRS cannot require a taxpayer to appear for an interview without the representative’s agreement. The IRS often attempts to get the taxpayer to voluntarily agree to an interview. The taxpayer should not agree to an interview. IRS agents are well trained in establishing a rapport with the interviewee, setting up an environment in which the taxpayer often says exactly the wrong thing.
The IRS’s Internal Revenue Manual states:
“The following suggestions will help the examiner obtain answers that are complete and accurate:
- Use short questions confined to one topic that can be clearly and easily understood.
- Ask questions that require narrative answers, avoiding “yes” and “no” answers, whenever possible.
- Whenever possible, avoid questions that suggest part of the answer, i.e., leading questions.
- Ask how the taxpayer learned what they state to be fact. The taxpayer should also be required to provide a factual basis for any conclusions stated.
- Be alert to instances where the taxpayer starts wandering or going off topic, and redirect the taxpayer’s attention to the current talking point. Where possible, ask questions that require a direct response.
- Concentrate on the answers of the witness, not the next question.
- To ensure the accurate collection of facts, the examiner should clearly understand each reply provided and ensure that any lack of clarity is eliminated before continuing.
- When all important points have been resolved, terminate the interview. If possible, leave the door open for further meetings with the subject.
An IRS examination can be scary, shocking and even a bit painful. Information and documents requested may be difficult to find. Your explanation of the tax return issues may be incomplete or misleading. Your statements and comments during an interview, if you agree to an interview, may be used against you in the final examination report.
Having a tax representative experienced in tax controversy matters may be your best choice in surviving the IRS examination. Just pick the right representative.
William B. Lowrance
Surovell Isaacs & Levy PLC
4010 University Drive, Second Floor
Direct Dial: 703.277.9771
Posted in: Tax Controversy