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INCOME TAX AUDIT EXAMINATION

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An IRS audit is generally an impartial review of your tax return to determine its accuracy.  It is not an accusation of wrongdoing.   The taxpayer has the burden of proving that his or her return is accurate. The IRS does not have to disprove anything.  For example, if you claim a deduction for $100 worth of clothing given to a charity, it is up to you to prove that such gift was made, and to support the $100 value claimed.  If the IRS questions the deduction and you do not provide proper evidence regarding the gift, the deduction can be disallowed.

If you are notified that you will be audited, don't panic but take it seriously.    First, read the letter from the IRS carefully and determine what they are asking you to do.  It may be as simple as signing your return. There are three basic types of audits, and the letter will explain which one applies to you:

    • A Correspondence Audit is for minor mistakes. The IRS letter will tell you what documentation to send them by mail.  Once the IRS receives the proper paperwork, the matter will be closed.
    • A Field Audit is one where the auditor comes to your business or home to verify the accuracy of your return. If you prefer, in most instances this type of audit can be conducted at your representatives office.  This type of audit is usually done where the return includes business operations. If your records are neat and in order, it will suggest to the auditor that you are a conscientious business person.
    • An Office Audit requires that you or your representative physically appear on a specific date and time at an IRS facility and bring your documentation.   Bring only the documents asked for. Do not discuss items or areas that are not covered by the original IRS request.  If the requested or scheduled appointment date and time are not convenient for you, phone and reschedule as soon as possible.

Do I Need Professional Help?

Probably. Taxation is very complicated and technical.  You will benefit from having an expert on your side. If you had an attorney or CPA prepare your return, you may want to bring or send that person to the audit.  Professional tax return preparers will accompany you to an audit or will represent you at an audit. There is generally no requirement that you personally attend meetings or ever talk with an IRS auditor.   Weigh the amount of tax in question against the cost of using professional help.

Can I Appeal the Findings?

Yes, you can either agree or disagree with the auditor's findings.  If you agree, the examination is finished upon completion of some paperwork and payment of any outstanding amounts.  If you disagree with the auditor,  the issues in question can be reviewed informally with the auditor's supervisor or you can appeal to the IRS appeals office, which is independent of the IRS office that conducted the audit.  If you do not reach an agreement with the appeals officer, you may take your case to the U.S. Tax Court, U.S. Claims Court or U.S. District Court.  The Tax Court generally hears cases without the necessity of having to pay the tax in question.  Interest is due on any tax ultimately found to be owing. The Claims Court and District Court generally hear tax cases after the assessed tax is paid and a claim for refund has been filed.

If you do not agree or disagree, the IRS has formal procedures to help you make up your mind.  Within a few weeks of your audit, you will receive a letter that gives you 30 days to either agree with the auditor or file a formal appeal.  The letter will explain the steps to take, depending on your choice of action.  If you do not respond to the 30-day letter, or if you do not reach an agreement with the appeals officer, the IRS will send you a "statutory notice of deficiency (90-day letter)," giving you 90 days to file a petition with the Tax Court. Ninety days means 90 days and not three months.  If you take no action or your response is not timely, you lose your right to go to Tax Court, and the IRS will assess the additional tax against you.  If this happens, your only remaining remedy is to file a claim for refund and go to the U.S. Claims Court or U.S. District Court.

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