Volume 8 Issue 1 -- January/February 1996
In dealing with a tax audit, there are certain basic guidelines that should be observed. Many of these relate to controlling the flow of information to the auditor. As was suggested in the last issue, having a tax professional respond to the auditor's inquiries and provide the necessary information is usually the best choice.
Do not have a variety of employees providing taxpayer records to an agent. In some cases audits are precipitated by disgruntled employees and one can imagine how such an employee may respond to request for information.
Assuming you have decided to use a tax practitioner, what if the IRS wants to conduct an audit during what is commonly referred to as the "tax season," January -- April 15th. During this period most of tax practitioners are quite busy doing tax returns.
Since many taxpayers handle audits by themselves there is ample for the IRS to do year around. Delaying an audit involving a tax practitioner will not cause unemployment in the ranks of IRS auditors. Usually, reasonable requests to delay an audit or speed one up so as to avoid the "tax season," will be entertained by the IRS. Of course not all such requests for rescheduling can be honored, but many are.
In some cases involving tax representatives the auditor may believe, correctly, that there should be a face to face meeting with the taxpayer or the officers of the taxpayer. While there are a host of reasons for such face-to-face meetings, often the perceived need stems from a failure of the tax practitioner to provide needed information to the agent.
What if the IRS insists on meeting the Taxpayer? Some times tax practitioners needlessly delay audits or clients fail to provide information on a timely basis. A book could be written on the myriad scenarios in which the agent may ask, and then insist upon, such a meeting.
In such cases the best thing to do is have the meeting. Let the taxpayer respond to the agent's questions and then try to regain control of the process. Remember, the IRS has tremendous information obtaining abilities. Among other things it can issue a summons (like a subpoena) to the taxpayers and third parties for information. If necessary a summons can be enforced by a Federal District Court.
Don't Argue with an IRS Agent. It is a losing game, no matter how or by whom provoked, to get into a heated argument with an agent.
In addition to a full arsenal of information gathering systems, there is the "presumption of correctness." Stated differently, and unlike in criminal law, IRS adjustments (a notice of deficiency) are presumed correct.
This means that if all communications fail and a notice of deficiency is issued, the burden of proving the IRS wrong rests on the taxpayer. Many litigated cases grow from the seeds of discontent between IRS agents and taxpayers. Cooler professional heads could have interceded in many such situations.
If it seems an agent is wrong in some respect, delays the process unreasonably, is overly aggressive, or the like, consider the following strategy.
Explain your belief to the agent. The "world won't end." If the agent persists in a questionable course of action, then call the agent's immediate supervisor and relay the substance of the conversation with the agent. While there is no guarantee that the IRS supervisor will agree with you, most of them want to know about errant IRS agents.
In any event, it is important to remember that the IRS wins about 80% of its litigated cases (or at least the ones you hear about). Many of these victories grow from an unhealthy mixture of taxpayer-agent friction and odds that clearly favor the government.
Taking a sound approach to handling an audit can improve the chances of a favorable result.
Usually, the best chance for success comes while the matter is still in the auditor's hands. Once the audit is completed, the chances of reversing an unfavorable result go down dramatically.
- Plan how to handle the audit and who will do what.
- Explain the methodology to the Agent.
- Provide, within reason, requested materials through just one person and let a tax professional respond to all or most questions, particularly substantive questions.
- Refrain from futile arguments.
- If a problem develops with an agent, discuss it first with the agent and then if you believe the agent is clearly wrong ask to speak with the agent's immediate supervisor.
By Tax and Business Professionals, Inc.
9837 Business Way
Manassas, VA 20110
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