Ask the taxgirl: What To Do When You Get an Audit Notice

Taxpayer asks:

Dear taxgirl, I need some help. I am being audited by the IRS and I don’t know what to do. I am self-employed (web design) and I do not have many records to back up my tax returns. I didn’t lie on my taxes but I can’t prove it. I don’t know what to do or what to give them or not (the letter asked for a lot of things including my PayPal statements). I’m scared because I don’t know what to do and I don’t want to lose my house. Please help.

Taxgirl says:

I know from experience that audits suck. But they’re not the end of the world. So don’t be scared. You’ll get through this.

Here’s my take. While it’s not impossible to manage an audit on your own, I don’t recommend it. And based on what you’ve said so far, it sounds like a fairly comprehensive examination – it also sounds like you’re already somewhat involved in the process (PayPal statements are a pretty specific request). So here’s my best advice: hire a good tax attorney.

I know, I know. You’re worried about the expense. Two things: 1, your legal bills for the audit probably aren’t as bad as you think they’ll be (and may even be deductible) and 2, a good tax attorney can be instrumental in digging you out of trouble at audit or reducing your potential final bill.

So I’ll throw in a third thing: a neutral party like an attorney can make your life much easier. I’ve had a number of clients who have dug themselves deeper into trouble just based on the “freak out” factor. That’s when a client gets worried about the audit and gets overly defensive – then they either say too much or not enough to the IRS. Even worse: the client stops answering IRS altogether. That’s the worst thing that you can do. No matter whether you hire an attorney or not, cooperating is generally a good idea.

Nobody wants to be audited. But it happens (and it’s happening more often to more taxpayers these days). Take a deep breath and find a good tax attorney. You’ll be glad that you did.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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Comments

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  2. Mary Kay Foss

    A CPA can help with an IRS audit as well. I’m involved right now with an audit for a couple that each had Schedule C businesses. They did their own returns and it’s been easier to have a third party interfacing with the IRS person. The IRS examiner only needs to meet with the taxpayer once – every thing else can go through the representative hired to handle the audit.

    With the audit I’m involved in, they also asked for the Paypal records. The auditor said they’ve found many taxpayers have been ignoring sales that came through Paypal because they didn’t hit the bank account.

  3. Jeff Day

    An attorney is good, a CPA is better, a competent EA is the best choice.

    Jeff Day

  4. Author
    Kelly

    It’s a bit more complicated for non-attorneys who wish to practice before the Tax Court (there’s a long admissions procedure together with an exam). If an audit has the potential to become a Tax Court matter, that’s an important consideration.

    Additionally, CPAs and enrolled agents cannot practice in federal court unless also licensed as an attorney. The scope of the matter does matter when considering who to hire.

  5. Jeff Day

    Through the last several years, I have probably had about 20 cases where we petitioned to the tax court. That automatically caused the IRS to send back to the appeals office. Each and ever case a resolution was made with the appeals.

    Through the last several years, I have probably respresents no less than 20 taxpayers in an actual field audit. Never have we not been able to arrive at an amicable resolution, a few times had to go to appeals. But a resolution was 100% of the time achieved.

    Through the last several years, I have probably represented over 100 taxpayers as a result of a CP2000 notice or a correspondence audit asking for such things as verification of contributions on a schedule A. Never have we not been able to arrive at an amicable resolution.

    The costs that the taxpayers would incur having hired a tax attorney would have been multiples what they paid my employer for my services. If the “taxing” situation was above my “pay grade” I would not attempt to represent. I believe most competent EA’s or CPA’s would have the same attitude. However, when I think of a tax attorney the names that are on our televisions every night hawking no more than an OIC at outrageous fees come to my mind. To my way of thinking those firms should be disbarred and fined.

    Jeff Day EA

  6. Author
    Kelly

    I agree with your comments re ads but most tax attorneys aren’t like that… and many of those services aren’t even populated by tax attorneys, just run by them. As to fees, I think that most people believe that attorney fees are higher than they actually are. Yes, there are super expensive attorneys but many are reasonable. In fact, the fees at my firm (and similarly situated firms in my area) are less than the fees for many of the CPAs that we work with (not kidding).

    I do think that audits can actually be resolved by agreement more often than not. There are cases where you may need to file a protective active in Tax Court, though, because of the statute of limitations. We had that issue earlier this year. The Service was slow to process some amended returns and they wouldn’t expedite. We had to file in Tax Court to preserve our right to fight the assessment *just in case*. In another matter, the Service was willing to settle but a third party taxpayer who had an interest refused to consent, so off to Tax Court we went. My point is that while not all audits need to head to Tax Court (and shouldn’t), sometimes it’s a necessary evil.

  7. lucy

    we just got a soft audit notice in the mail for 2008, we did forget a few items.
    we followed all the directions and are awaiting the result.
    my friends moved to NY to live with parents.
    they just received soft audit notice via mail, so did their parents.

    the “middle class” is doomed – from this day on, anyone making over $60K is looking ripe for picking…

  8. Nancy

    Unfortunately, the IRS has been really hard on people this year. Audits are up and people are really stressing out about them. The best thing to do is hire a really good CPA firm that has a really good lawyer. The pricing is something you need to think about, what you pay is what you get. If you need help finding a cpa, our website offers free advice on how to search for the “right” cpa for you. Check out http://www.taxproblem.org.

  9. Mitch

    If you’re reading this, it sounds like you’re being audited (or at the very least, concerned that you will be). Most taxpayers who are audited for the first time think that they can probably just show up for the examination (1) without a professional representing their rights, (2) only partially prepared with some of the documents that were requested, (3) and somehow make friends with the examiner and just plain hope for the best. Forget it!

    You clearly need professional representation (even if you think you’ve done everything right). Why? Because that $1,000 that you thought you were going to have to pay if you were to ever get audited, can quickly turn into $10,000 and several meetings thereafter before you get done.

    Hiring the “guy who prepared your return” is not usually your best bet. Even the best preparers who are quite knowledgeable on the most recent tax laws may not be as knowledgeable on IRS audit procedures, or have the experience to protect your rights. Hiring a high-priced tax attorney also may not be your best bet if your return’s not all that complicated and you’re meeting with the IRS for the first time.

    IRS audits appear to be at an all-time high with significant increases in 2011 anticipated. Similarly, the IRS has more access to more information than ever before, and is using this information to review the accuracy and completeness of your tax returns.

    When first getting that audit letter, interview several, local professional representation firms to see who’s right for you. Request ample time to get prepared and gather whatever you need to support your position(s) on your tax return(s). Find an error? Correct it – prior to going into the examination. See if this same mistake can apply to other tax years and do the same. Be prepared and be professionally represented. “An ounce of prevention is worth a pound of cure.”

  10. Joe Mastriano, CPA

    It’s best to hire a licensed CPA with a licensed CPA firm. CPA’s have to have post undergraduate training and pass an extremely hard exam. Enrolled agents need no education beyond high school, and don’t have to take the enrolled agents exam if worked for the IRS for a certain number of years. CPA’s are known as the highest level of fiduciaries. CPA’s are the most regulated. You may hear of a large law firm or of enrolled agents who have many business infractions. CPA’s would lose their license if they had such complaints.
    With that in mind, it’s always best to hire someone who has the knowledge, experience, and reputation for responsibility. They can have any license. The license don’t make the person. Is says nothing of their experience or ethics.
    If you don’t hire someone and try to represent yourself, it is likely you will be taken advantage of by the IRS. Over the years, some IRS employees have attempted to brow beat me into their way of thinking. It can get pretty ugly sometimes. Those of you who want a taste of the IRS can find valuable information on my site under the free advice tab. I wrote it to help people avoid having to deal with the IRS on their own, if they couldn’t afford legal fees.

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