What Should You Do If the IRS Audits You?

We all dread the thought of the IRS (or state tax authority) contacting us to audit a prior year return. If you are audited, you can manage the audit yourself, or hire a tax attorney, CPA, or enrolled auditor (“tax professional”) to represent you.

If you decide to oversee the audit yourself, you should do the following at a minimum:

1. Read and carefully follow the instructions provided in the audit notice, and other information the tax authority sends you,
2. Organize your records so you come across organized,
3. Replace any missing records,
4. Provide only the information requested,
5. Be polite and professional, and
6. Know your rights as a taxpayer.

If you hire a tax professional, hire a good one. How will you know they are good? Start by reviewing their background (i.e., what credentials do they have, what work experience do they have, etc.). Also consider whether they specialize in tax audits and appeals, or something else.

Another thing you can do is to ask the tax professional how they plan to help you. Their response should include how they will manage the audit, which should include managing one or more of the following: Relationship with the Tax Auditor, Potential Audit Adjustments, Scope of the Audit (e.g., time, questions asked, and information reviewed), Flow of Information, and The Audit Process.  We discuss below how a tax professional can manage each of these.

Relationship with the Tax Auditor

Establishing a good relationship with a tax auditor is a key step. One aspect of establishing a good relationship involves developing credibility and trust. This can be done by timely providing information, keeping promises, thoroughly knowing the facts and law, and verifying the accuracy of all facts prior to providing them. When an auditor trusts the tax professional (or at least has no reason not to trust them) and respects their technical abilities, they are much more likely to be reasonable and sometimes simply concede an issue without much effort. When a tax professional is not providing information timely or provides conflicting information, the auditor may decide to reach his own conclusions based on other information he has available. And, if a tax professional has not developed a good working relationship with the auditor, the auditor may be more distrustful and require a higher level of compliance with certain rules.

While many auditors are reasonable to work with, not all are. When an auditor is unreasonable it is important to remain calm, respectful, and professional. If you lose your cool, the auditor may hold it against you.

Potential Audit Adjustments

There are a couple of ways to manage potential audit adjustments. To start, a tax professional should determine what sensitive information a client has. Knowing this can help the tax professional steer the auditor away from those issues. And the more informed a tax professional is about the facts and law related to an issue, the sooner he can advocate for a certain position. This often has an impact on what issues an auditor decides to follow up on.

As an auditor works through the audit, it is important to stay in close contact with them to know what they are concerned about. The goal is to avoid having them spend time writing up an issue, because once they do this it can be more difficult to change their opinion. So, by communicating often and understanding what an auditor is working on, a tax professional can present the relevant facts and law sooner rather than later. And, if the auditor does not agree with the tax professional, they can ask if they can draft a memorandum outlining the issue in more detail. It often helps sway the auditor’s point of view when they are provided a well-reasoned and persuasive analysis of the facts and law.

Scope of the Audit (e.g., time, questions asked, and information reviewed)

It is often best to try and limit the scope of an audit and most audits present opportunities for a tax professional to do just this. To begin, a tax professional should carefully review the information requested and then provide only that information. Sometimes providing more information may be helpful. But this should be done only after careful consideration.

If the auditor requests a large amount of detailed information, and the tax professional does not believe it raises any issues, it may be best to provide all such information (and more), so the auditor spends their time reviewing those less sensitive matters. An auditor only has so much time to conclude an audit before they get pressure internally to complete the audit. This should be used to the taxpayer’s advantage. Alternatively, if an auditor requests a large amount of sensitive information, the tax professional should inquire if the request can be modified to be more reasonable in scope.

Flow of Information

To help manage the flow of information, a tax professional should establish himself as the only point of contact for the auditor. This will keep the auditor from asking the client (or his/her employees) questions when you are not present. Those conversations can create complications, especially when not all pertinent facts are conveyed, and the auditor receives an incomplete picture that impacts their perception.

Another thing a tax professional should do is keep a log of all information requested and copies of all information provided. This can be useful in a number of situations. One such situation is if the tax professional needs to appeal an auditor’s adjustments, they will know exactly what information the appeals team is looking at. Such a log can also be helpful should the auditor try to claim the client has not been responsive to information requests.

The Audit Process

It is helpful in many instances to understand the audit process and how to use it to a client’s advantage. For instance, it is important to know that auditors are under pressure to complete their audits within a certain amount of time. Knowing this, and when to use it, can be hugely beneficial. It also helps to know what a taxpayer’s rights are when an auditor is acting inappropriately. In some instances, it may also help to elevate a matter to the auditor’s manager or to the Taxpayer Advocate (for IRS matters). In other instances, this may do more harm than good. A good tax professional will know when and how to use the audit process to a client’s advantage.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.