The mere sound of the words “tax audit” sends chilling thoughts through taxpayer’s minds. There are different types of tax audits. There are tax audits that just require a taxpayer to mail in information to substantiate an entry he or she made on an income tax return. These are called Correspondence Audits. And then there are tax audits that require the taxpayer to attend a meeting at the taxing authority’s office. Likewise, there are tax audits where a field agent visits the taxpayer at his or her home or place of business.
Although most tax audits are the kind where you just need to send in proof of a deduction, expense, or other entry on your tax return, the in-person audits cause the greatest anxiety to taxpayers because of the uncertainty of what will occur at the tax audit and then what the fallout or consequences will be once the agent has received the taxpayer’s responses during the tax audit.
In-person audits can be in the form of office audits or field audits. The office audit requests that you appear at the office of the IRS or other taxing authority office and bring with you specific documentation. The field audit can take place at your home, place of business, your attorney’s office or your accountant’s office.
During the in-person audit, the agent is seeking to gather facts of your personal situation, i.e. your assets and standard of living as well as your business income, expenses, and operations. The agent will request a broad range of information and you should comply with only reasonable requests. Based upon the letters you receive prior to the audit, you should provide only that information related to the tax years in question subject to the audit. In other words, don’t allow the agent to go on a “fishing expedition”. The type of documentation that should be provided to the agent includes personal and business bank statements, expense reports, income reports, canceled checks, credit card statements, mileage logs, receipts, and corporate records.
At the end of the tax audit there may be additional documentation that the agent may request of you to send in within a certain period of time. Nevertheless, after the audit is completed, the agent will prepare a report showing the findings of the tax audit. The report may show a finding that additional taxes and penalties may be applicable. If you disagree with the agent’s findings, you have a right to appeal the findings. If you agree with the agent’s findings, then the next step would be to negotiate a payment plan, including an installment agreement. The IRS or the taxing authority may request that you waive your right to appeal, which you do not have to sign.
The taxpayer, whether an individual or a business, may appeal an agent’s findings within 30 days after receiving the agent’s report. There are different avenues to make an appeal. A taxpayer may appeal to the agent’s supervisor, to the IRS directly, to the U.S. Court of Federal Claims, or to the U.S. District Court. If an appeal is not pursued within this 30 day period, a Notice of Deficiency will be issued. Thereafter, the taxpayer’s appeal rights are to the U.S. Tax Court within 90 days of issuance of this Notice of Deficiency.