So you got the IRS audit letter. Lucky you! Once you’ve calmed down you’re going to have to deal with it and we can help. There’s basically two main types of IRS audits – those that you reply by mail and those that ask you to call to schedule an appointment. The first type is called a correspondence exam. The IRS identifies issues that you may have reported incorrectly or simply require clarification. The second type is called an office visit or examination where the IRS is going on a fishing expedition by looking at all items on your tax return and see what pops up.
In a correspondence exam, you’re often given a letter (CP-2000) indicating what the IRS believes are the changes needed to correct your return and pay your taxes. You have a chance to agree to all changes, some of the changes or simply disagree with all the changes that have been proposed. If you agree, you simply reply indicating the same. If you disagree, you need to reply indicating why and provide documentation supporting your position.
The office visit is much more comprehensive. This is usually reserved for self employed taxpayers or taxpayers where there are too many items on the return for the IRS to make its best guess what you owe. If your return is selected for an office visit, you are best advised to seek professional representation to protect your interests.
Once the examination is concluded, the proposed changes (Form 4549) are sent to you for your agreement. Shortly thereafter, you will be asked to pay the additional tax. If the audit shows that your income and taxes were under reported, you can pretty much count on your audit being expanded to other tax years (sometimes the year before and sometimes the year after). If you have the same issues in other tax years, you can often expect your taxes to be increased in other years as well.
But what if you don’t agree!
If you don’t agree, you can first request a supervisory review of your issues. This is your first line of defense. In most cases, you won’t be successful as the results are generally reviewed first before you receive them by this same individual. You can also request an administrative appeal. The appeal gives you the right to bring the case before a brand new IRS person who takes a fresh look at your case and why you disagree. If all else fails, you can also bring your case to tax court. Each of these taxpayer rights is time limited, so its always best to act as quickly as possible where you can.
Can you Do It Yourself?
Sometimes. In correspondence exams this is much easier. You simply reply by letter indicating your agreement and pay your taxes. If you can’t pay, that’s another story. You can even represent yourself in an office examination – by why would you? You need to be on equal footing with the IRS so they don’t walk all over you. Even the best negotiators know their limitations. You don’t know your rights, you don’t know tax law and you don’t know IRS procedure. The more complex the issues and the greater the tax can be, the more you need professional representation.