Audit Assistance & Representation

Perhaps one of the most feared powers that the Federal Government has is the power to audit taxpayers' finances and review their tax records. Recently, the Internal Revenue Service is expanded their examination branch, particularly in the areas of small businesses and the self-employed. The increased presence of tax auditors means that more tax returns will be selected for audit each year than in previous years. This means taxpayers will have a higher probability of being audited in the future, further emphasizing the need for good tax records and accounting practices.

An IRS audit can be conducted in several different fashions, and for several different reasons. Many cases are drawn randomly for examination, and can be concluded through mail or telephone correspondence to clarify any objectionable deductions or expenses. Other audits are hand-picked or drawn as a result of deviations from a standard set of deductions. The common denominator in both random and selective audits is that they both target small businesses and self-employed individuals over wage earners. Previous statistical analysis indicates that the self-employed were more than 4 times more likely to be audited by the IRS, but with the recent increase in the Federal Government's audit workforce, that number is likely to increase fairly substantially in 2008.

If you are selected for an audit, you will need to know what the IRS will be looking for, and you will need to be able to counteract some of their proposed changes. Although every case is unique, there are some standard elements to every audit. These elements include:

• Verifying all sources of income, but also verifying what should not be considered income. In many cases, a simple review of deposits made to a bank account will not accurately reflect monies that are transferred between accounts, or monies from loans and lines of credit that are not taxable.
• Providing receipts for all purchases and verifying the nature and payment of all expenses. If full documentation is not available, you may be able to reconstruct or substitute items from memory or from other sources (such as credit card statements and bank statements).
• Copies of corrected or amended tax documents, such as W-2s, 1099s, and 1098s. If changes were made to these documents, they may not always be on file with the IRS or Social Security Administration.
• Copies of the original returns, and all supporting information as provided from your tax preparer. If the return is self-prepared, gather all information from which your return was prepared such as your spreadsheets, check registers, bookkeeping records, and the like.

Because most audits occur approximately 2-3 years after the return is filed, most taxpayer's will not be familiar with the contents and subject matter of their return if it is selected for audit. They must refamiliarize themselves with the finances of that tax year, and immerse themselves in their records. In essence, they must begin to think like an auditor. The taxpayer bill of rights allows for a taxpayer to be treated fairly and impartially in these matters, and also allows them remedies should their be disputes, so taxpayers should familiarize themselves with their options and countermeasures. Some of the best methods to help your situation lay in the simple elements surrounding your audit. First, be courteous and respectful, but don't hesitate to ask questions and defend your position vehemently. Communication is truly key, as the agent conduncting the audit may be left to assume certain items if you don't take the steps to clarify their points of contest.

Second, you will want to give yourself every advantage in matters of perception and psychology. Scheduling an audit at your home or place of business may give you some comfort in being at a familiar location, but it may impose a certain bias on your examiner. They may make assumptions about your business' finances simply from appearance, or they may jump to conclusions on your personal fiscal matters by seeing your residence. Instead, try to schedule the audit at an IRS facility, or have the discussions take place at your accountant's or attorney's office. Additionally, you may not want to rush your auditor. The more thoroughly you address your finances, the less likely the IRS will be to make assumptions that could affect you negatively.

Finally, you have the ability to seek professional services to help with your audit scenario. If your return was prepared by a CPA, he/she may be able to represent you in the audit. Tax Attorneys and Enrolled Agents also have the ability to represent taxpayers during an audit. If seeking assistance with an audit examination, you will want to bring these individuals into the process as quickly as possible to ensure that they are familiar with your return and financial circumstances. They can identify weaknesses in your case and help you prepare evidence for the purpose of counteracting the IRS's proposals. They can also show you contingencies and outline a likely outcome to your situation.