IRS AUDITS

An IRS audit is a detailed examination of your tax return. The auditor will match the figures that you reported on your tax return against the supporting documentation that you used to prepare the tax return, as well as a cross-matching of data that external parties (such as employers and banks) reported to the IRS and Social Security Administration. The IRS auditor examines all of this information to determine if the return you filed was accurate and compliant with tax laws.

The IRS auditor has one objective — determining if you owe the IRS more than you paid. Getting an IRS audit letter can seem scary, but don’t panic! With qualified representation from a firm like ours, navigating the audit process can be easy peasy. 😊

There are three types of IRS audits, and each varies in both location and complexity:

• ✔️ Correspondence Audits: These are mainly done by mail and are more typical for what the IRS considers “small dollar” audits. They are mainly triggered when a tax return appears to be missing taxable income that was reported to the IRS by external parties.
• ✔️ Office Audits: These audits take place at an IRS field office. The auditor requests that you bring all of your supporting documentation and participate in an interview. The questions asked are often designed to determine if the auditor can uncover more potential tax liability than the IRS may already be aware of.
• ✔️ Field Audits: The most invasive, comprehensive type of audit. The IRS will ask to visit your home or business or your tax preparer’s office to conduct both the audit and an examination of the premises. Although post-Covid rule changes have greatly reduced field audits, these audits still do exist.

Each type of audit has its own hurdles, and it is not recommended to go at it alone. Proper IRS audit representation by an excellent firm like Pink Harbor, CPA, can greatly reduce the likelihood that the IRS will violate your rights. 🤝

Possibly, but statistically unlikely. Only a licensed CPA, enrolled agent (EA), or tax attorney can legally represent you in an audit. These professionals are specifically authorized to advocate for you, present documents, and handle negotiations in your stead. If your preparer lacks these credentials, they are considered an “unlicensed tax preparer”; therefore, they cannot legally represent you. Some of those preparers have good intentions and offer to help you for free. Still, their help can often actually make your situation worse because they often lack the training, resources, and practical experience needed.

By hiring a credentialed professional to represent you in the audit, you can turn what would have been a disaster into a “no change” audit. Going forward, you should always consider only hiring a credentialed professional to prepare your tax returns. The Taxpayer’s Advocate Service has determined that only 21% of returns filed annually are prepared by credentialed professionals.

Here are the five biggest things that are useful in an IRS Audit:

• • ✔️ Prepare Well-Organized Records: You should neatly arrange all of your receipts, documents, and other supporting information so that the audit process can be streamlined. The more disorganized the information you give the auditor, the more likely it is that legitimate deductions will be ignored because the auditor cannot decipher what you gave them.
  • ✔️ Professional Representation: An experienced CPA like Pink Harbor, a CPA, an EA, or a tax attorney navigates you through the maze of complexities while also advocating for your best interests.
  • ✔️ A Calm and Cooperative Attitude: You should always be mindful that you are dealing with human beings. Just like you, the IRS auditor has a job to do. Acting respectfully and courteously to the IRS auditor often leads to an environment where the auditor might even be helpful to you by prodding you for things that would be in your favor.
  • ✔️ Know Your Rights: The best place to start learning about what the IRS can and can't do is to read the Taxpayer's Bill of Rights.

Knowing the resources and where to find them will help you prepare for an IRS audit. Some items that are must-haves are:

• ✔️ IRS Publication 1 (Your Rights as a Taxpayer): This publication contains valuable information and one of the most important documents: the Taxpayer's Bill of Rights.
• ✔️ Internal Revenue Manual (IRM): The IRM is the IRS's "playbook" and contains the policies, procedures, and guidelines that the IRS must use to administer the United States tax laws. The majority of the IRM is public record.
• ✔️ Taxpayers Advocate Service: Established by Congress in 1998, this service advocates to ensure that the IRS follows the rules and does not abuse taxpayers.
• ✔️ Credentialed Professional Help: Engaging the services of a firm such as Pink Harbor, CPA, can ensure you have expert advice and representation.

You just received an IRS audit letter - but don't panic. Here's what to do:

• ✔️ Read the letter carefully: Understand why the IRS is auditing you.
• ✔️ Contact a credentialed tax professional: Determine your next steps and whether representation is needed. There may be a consultation fee like seeing a doctor, but this is often a wise investment.
• ✔️ Bring all required documents: Ensure you bring all documents the professional asks for (in an organized fashion) to the consultation.

An IRS auditor has specific powers, but there are clear limits as well:

In substance, a CP2000 letter is not an audit but a notice of proposed changes to your tax return. In form, the CP2000 serves the same function as an audit - identifying discrepancies between what was reported to the IRS (like W-2s or 1099s) by third parties and what you reported on your tax return.

Just like an audit, you must provide substantiation to the IRS if you disagree with the CP2000 notice. Otherwise, the IRS will determine that the tax liability they proposed is valid and enforceable for collection.

You should never ignore these notices. ⚠️

Yes, the IRS can visit you at home, but this typically happens during a field audit or if you owe a large amount of taxes. These visits must be announced beforehand, and the agent must adhere to health and safety measures. The agents must also present proper identification.

It is never a good idea to interact with an IRS auditor at your home or business without having someone to represent you so that your rights are protected.

Yes, the IRS auditor can visit your job for audit or collection enforcement purposes. However, the IRS auditor must act professionally and cannot intentionally disrupt your work environment.

Their sole purpose cannot be to intimidate you into agreeing to or paying the tax liability.

IRS audit letters are sent from various locations. While the outside of an envelope may not have a return address, the enclosed letter must include the address where the office was sent from and a telephone number for the taxpayer to contact that office.

You should be cautious of scams, as there are bad actors who operate fake IRS collection schemes.

The chances of getting a random IRS compliance audit are extremely low. Typically, audits are triggered by certain factors. For the tax year 2019, the Government Accountability Office issued a report stating that the overall audit rate was only 0.25%, or 1 in 400.

The IRS has been attempting to shift the focus of audits from low-income taxpayers to taxpayers with incomes over $400,000.

While some IRS audits are random, most have a specific action that triggered them. The IRS uses a computerized scoring system called the Discriminant Information Function (DIF) to flag returns that deviate significantly from statistical norms.

Other "audits" (such as CP2000 letters) result from the tax return not matching information reported to the IRS.

Yes, the IRS can audit you every year. The IRM has no law or policy limiting how frequently the IRS can audit you. The IRS can also initially audit you for one year and then expand that one-year audit to cover multiple years.

Recurring errors, omissions, or unusual patterns in your filings will trigger frequent audits. Having a qualified professional such as Pink Harbor CPA prepare your tax return legally and accurately, free of any omissions, can reduce the risk of a DIF-initiated audit.

When the IRS audits you, you should expect the following steps to occur:

• ✔️ Notification: The IRS will send you a letter describing the reason for the audit and what is being requested.
• ✔️ Contact a Credentialed Professional: While not required, it is best to consult with a professional to develop an understanding of what to do next and your risks.
• ✔️ Preparation: Gather all necessary documents and organize them clearly. If necessary, prepare lead sheets, such as a table of contents.
• ✔️ Review: The IRS auditor will review the documentation you provide them with, as well as any interviews conducted.
• ✔️ Outcome: The IRS auditor will conclude the audit and issue a letter that will state with no changes, a refund, or additional taxes owed.
• ✔️ Appeal: If you disagree with the audit results, you have the right to appeal and possibly argue your case in the United States Tax Court.

The IRS audits tax returns to ensure compliance with tax laws and regulations. While the IRS does not typically make any public comments regarding a specific audit, it may sometimes refer taxpayers who commit criminal tax acts to the Department of Justice for criminal prosecution.

The latest information available was issued by the Government Accounting Office in 2022:

• ✔️ 54% of audits: Taxpayers earning less than $25,000.
• ✔️ 20% of audits: Taxpayers with incomes above $25,000 but less than $200,000.
• ✔️ 74% of audits: Focused on the low income and middle class.
• ✔️ 3% of audits: Conducted for taxpayers who made over $10M.

You will not be audited by the IRS simply because you owe taxes. Owing taxes alone and not paying the tax liability will almost always trigger the IRS to initiate collection activity to collect the debt.

If you owe taxes and cannot afford to pay the IRS, you should set up a payment plan and pursue other actions, such as an Offer in Compromise.

The IRS can audit a tax return within the following time frames:

• ✔️ 3 Years: From the date the return was due or filed (whichever is later) if the tax underpayment is projected to be 25% or less than what was claimed on the originally submitted return.
• ✔️ 7 Years: From the date the return was due or filed (whichever is later) if the tax underpayment is projected to be over 25% more than what was claimed on the initially submitted return.
• ✔️ Forever: If a return was not filed or if the taxpayer committed fraud.

A field audit is the most serious type of IRS audit because it involves a thorough, in-person review of your financial records at your home, business, or representative's office.

The scope of a field audit can be vast, and the IRS auditor may request extensive documentation and dive deeper into your records.

No, the IRS cannot audit you without notice. You will always receive a formal letter, which will be either:

• ✔️ Letter 2202: Used for correspondence audits, called the "Initial Contact Letter".
• ✔️ Letter 2205: Used for office or field audits, stating "Your Return Has Been Selected for Examination".

The IRS has the authority to audit under the Internal Revenue Code, IRC Section 7602. This section gives the IRS authorization to do many things, including:

• ✔️ Examine Your Books and Records
• ✔️ Issue Summonses
• ✔️ Initiate Third Party Contact
• ✔️ Take Testimony Under Oath

If you disagree with the results of an IRS audit, you have options:

• ✔️ Request a Meeting: Speak with the auditor or their manager to address your concerns, but do so quickly before your appeal or tax court rights expire.
• ✔️ File a Formal Appeal: Use Form 12203, Request for Appeals Review. Attach additional pages and documentation as necessary.
• ✔️ Go to Tax Court: If you cannot get a resolution with either of the previous steps, file a petition with the United States Tax Court.

If you're facing an IRS audit, let us help you. As a trusted CPA firm, Pink Harbor, CPA has the expertise to guide you through the process, protect your rights, and minimize stress.

With our personalized approach and proven experience in handling audits, you can feel confident that you have a team of professionals dedicated to achieving the best possible outcome for you.