Villa Rose Associates Ltd.

electronicNewsletter

FOR IMMEDIATE RELEASE

                     IF YOU ARE AUDITED

If You Are Audited

Our voluntary system of compliance is tested periodically. This means we report to the government our income and deductions and compute the tax due our-selves.

To insure that the tax laws are followed, and the deductions are legitimate, the Internal Revenue Service has authority under the 16th Amendment to The Constitution (1913) to audit your tax return.

Are there different types of Audits

Yes.  There are generally three type of audits:

• Correspondence Audits
• Office Audits
• Field Audits

To be sure each audit has a different personality.  Sometimes the IRS also creates a strike force to audit a specific group like Taxi Drivers, or Physicians.

Correspondence Audit - The Internal Revenue Service sends a letter asking you to verify certain items of income and deductions on your tax return.  Generally, you can respond by mailing copies of your documentation (NEVER, NEVER mail original documents - they may get lost) back to the IRS.  If the IRS finds that you owe tax and you don't agree, you may request an office audit.

Perhaps the most common of these types of audits are a letter of Proposed Changes to your tax return.  The IRS calls this a CP-2000 letter. They propose a change and you can then correspond if you disagree.  They have taken the liberty to recalculate the tax if agree.

Office Audit - You receive a letter from a local IRS office requesting that you call for an appointment.  The items in question will be listed in the letter.  After making your appointment, you and/or your representative will present the records to an auditor or tax examiner at the specified time and place.  There the auditor will review the submitted documents to verify your deductions claimed.  Sometimes they accept the documentation but disagree how you have deducted them as a point of law.  If you agree the auditor will calculate the revised tax due or refund and interest, if any, and the matter will be closed. If you can not agree you have appeal rights. (See "What if I don't agree with the IRS.")

Field Audit - This type of audit is normally used for businesses.  The auditor will come to your home or place of business. A field audit may also be conducted in the office of a licensed representative (EA, CPA, PA, or Attorney), an especially good idea as accountants and auditors general "speak the same language"

How is a return selected for audit?

Normally a tax return is selected for an audit based upon a combination of factors such as the amount and type of income and the amount of certain deductions. For example for Medical deductions the Government under President Regan decided that you should pay for the first 7.5% of your income (adjusted Gross Income)  on medical expenses before you can take the first dollar of deduction.   So this amount must be high to qualify for deductibility.   Also the IRS tends to audit people with rental property, self employed business owners, and higher income people more frequently.

Professionals will tell you that you should never omit legitimate deductions simply because you're afraid of being audited. Normally not more than two percent of the population is audited in any given year.  Even if you don't take advantage of all the deductions you are allowed, you may still be audited.

In 1933 the United States Supreme Court ruled that tax avoidance by whatever legal means is your right as a citizen.  They went on to indicate the distinction of tax avoidance and tax evasion.  Avoidance is LEGAL and Evasion is ILLEGAL.

Since you're much more likely to be audited if you failed to report some income (the IRS calls you and under-reporter), you can limit the risk of being audited by accurately reporting all of your income.

What should I do if I am audited?

First, call your representative and inform him/her of the audit. For an Office Audit, your professional will call for an appointment as soon  as possible.  He/She will also consult with the tax preparer and determine which records will be needed for the audit.

After you have found all of your receipts and documentation it is a good idea for you or your representative to organize them.  If you take a bag of receipt and "dump" them on the desk of the auditor  more than likely they will be angry and/or may send you home to organize them.

Who can represent me at the IRS?

The Constitution allows you to be represented, if you choose to.  This means that It in not necessary that you go to the IRS office yourself.  Anyone can go with you to the IRS audit to present receipts.   However, only four types of individuals are able to appear on your behalf to present your records and to argue on your behalf.  These individuals are well acquainted with tax law and IRS procedures,  The four groups are Enrolled Agents or EAs (established in 1884), Certified Public Accountants or CPAs (established in 1964), Public Accountants or PAs, or Attorneys.   

In order to appear on your behalf the representative will ask you to sign a Tax Power-of Attorney granting your authority to be represented.

What if I don't agree with the IRS?

If you don't agree with the auditor, you may appeal your cause using one of several methods.

• First, you may appeal to the auditor's supervisor.
• Second, you may appeal direct to the Appeals Division of the Internal Revenue.   While the Appeals officer is an employee of the IRS, they are generally more knowledgeable and more objective than auditors. This is generally the best path of appeal.
• Third is going to Court.  If you are still not satisfied with the appeal officers rulings and can do either to District Court or Tax Court.  Tax Court even has a "small case" unit, where an attorney is NOT necessary.  This may be done without paying the tax due, If you file within the time allowed. The IRS will issue you a "STATUTORY NOTICE OF DEFICIENCY" if there is no agreement. You have 90 days from the date of the notice issued to file a Tax Court Petition. (NO EXCEPTIONS - 90 days.)
• As an alternative to Tax Court which generally is the best place to challenge a point of law, you may pay the tax and file a suit for a refund in either a U.S. District Court or U.S. Court of Claims.  Here you can even ask for a trial by jury. Generally you would choose this route if you are not challenging a point of law, but rather, in your opinion,   the arbitrary and capricious application of law, by the auditor and your appeals officer.

NOTE: In either Court setting most cases are resolved before the matter gets to the Court.  This is because the Courts REQUIRE that both side attempt to resolve there differences, in good faith, before coming to court.   As a matter of procedure the matter gets refereed back to the Appeals Unit, were a more senior staff member is assigned to resolve the differences, if possible.

This material is not intended to replace specific advice for your situation.  You are advised to discuss your situation with a qualified attorney or tax advisor. The rules are quite complex and we did not intend to over-simplify these complicated rules.  Our intention was to familiarize you the the concepts and vocabulary so that you may have an informed discussion with a qualified professional.