How to present your case - IRS Audits

It is very important that you not only put your case together with evidence, but that you have considered the presentation. If you do not know how to effectively communicate your defence, then the proof you have isn't as good as the paper it is written on.

Firs, you need to make sure you have selected the right person to represent you. You want to make sure that they have experience specifically with the IRS. You should also remember that lawyers, accountants and doctors are tax payers too and may be just as afraid of the IRS as you are. Meet with the person you have selected, and test their confidence. Depending on your situation, you may want an accountant, and attorney or both to represent you.

Once you have determined who will be representing you, or if you will be representing yourself, it is time to prepare the evidence. Make sure that you have found every relative piece of paper and no document is left un-turned. The IRS audit doesn't have to be stressful. A little discipline, time, preperation and knowledge should help you to relax. If you find that you, or your representation, needs more time to prepare, call the agent and ask for an extension. Extensions for IRS audits are generally granted for up to six months, but be aware that the possinibility of a second extension in very unlikely, therefore use your time wisely.

Here is the main documentation that you will need. This is a breif checklist that should help you begin yur document hunt.

Receipts to justify any deductions or credits that the IRS is questioning.

A list of the above reciepts, organized by date and include the amount and reason for each deduction.

A list, organized by date, of all cash expeditures. Treat this list as if it were a reciept for each purchase. List the reason for each expenditure.

Bank account statements organized by month and in order.

Reciepts for income, organized by date.


It is important to only present information that counters what the IRS is questioning. Do not offer up more information then needed and only asnwer direct questions with direct answers. This is one situation where more information is not better. The IRS auditor will give you the reasons for the audit, and a list of the items being audited. Prepare your defence based on that in question.

It is equally important to be well organized. You do not want the auditor to be required to dig through files to find the information he or she is looking for. This may uncover more mistakes or violations for the IRS to audit in the future.

With a little preperation and knowledge, you can get through the dreaded IRS audit.

Why is the IRS auditing me?

While there are many reasons that the IRS may audit you, it must first be understood how the IRS selects a tax filing for Audit. There are audits conducted just to compile data and statistics to figure out which types of industries, deductions, income and other tax related filings will provide the highest rate of return for the IRS through penalties, taxes and fines. Once the data audit is completed, the information is entered into a computer system that formulates high-risk combinations.

Now that your return has been filed, the entire return is entered into the computer at the IRS. The secret and highly guarded formula selects returns based on the probability that the filing is fraudulent, wrong or high risk. If your filing is in fact high risk, you may be selected.

While the formula is secret, we know some of the areas that the IRS data audits have found to be high risk. They include industries that deal with large cash transactions, the self-employed and a large amount of deductions to name a few. In industries that deal with large cash transactions, many times that income goes unreported therefore the IRS generally has a good chance of collecting money from those types of returns after the audit. The self-employed have an opportunity to file beneficially to the business owner, without regard for tax law. Since there is little checks and balances when an individual is self employed it makes a good bet for the IRS. Claiming a large amount of deductions, relative to that of others in your profession or industry, may alarm that formula in the computer. If the deductions are real and provide a large amount of tax savings, then certainly claim them. If the tax savings is minimal, it may be recommended to not file itemized deductions due to the possibility of an audit.

IRS tax law is complicated and open for interpretation. With that said, once you receive an audit there is little chance that some mistake won’t be found. The best thing you can do is try to avoid the audit all together by being careful, reporting all income and making educated decisions on your deductions. If you have done everything you can to complete an honest and complete tax return, do not worry. With proper documentation, representation and education, the audit can be minimal. Simply be patient, answer the questions at hand without elaboration and confer with a tax professional.

Bill of Rights during an IRS Audit

It used to be that the IRS had a final say and a lot of rights when it came to the power over the U.S. Taxpayers. Today however, the rights of taxpayers have been increased through the Taxpayer Bill of Rights. The first act was instituted in 1989 and the second was enacted in 1996. The last of the three was implemented in 1998. While it has always been an expectation that the IRS would deal with taxpayers in a professional manner, they must now also follow another set of code of conduct policies.

Remember the following information and certainly appeal or complain if the IRS does not follow these guidelines.

• First, the IRS must give you the tax information and any help that you need in order to comply with the IRS tax laws.

• The IRS must always ensure your personal and financial confidentiality.

• They must treat you in a courteous manner.

• The IRS must provide clear explanations in any tax notice or mail inquiries and provide additional information as requested.

• A non-technical statement of your taxpayer rights and information pertaining to the IRS collection and tax appeals procedures is required to be placed in all correspondence during an IRS audit.

• The IRS must collect the tax fairly. If the IRS threatens to collect in a manner that will cause you significant hardship, you can apply for a Taxpayer Assistance Order by filing IRS tax form 911 with an IRS Problem Resolution Office in the IRS district where you live. While your filed 911 form is being reviewed, the tax collections and enforcements will be suspended.

• The IRS must agree to a (3) year installment payment schedule if the taxpayer owes $10,000 or less, exclusive of interest and penalties if requested and certain conditions are met.

• Approval from a supervisor must be acquired before the IRS can file a tax lien or levy and the IRS must provide notice, which includes the amount of tax owed, the IRS’ proposed action, and notify the taxpayer of their right to a hearing within (30) days within (5) business days of such action. The tax notice must also include the IRS levy procedures, the availability of IRS administrative appeals, the IRS appeals procedures, and the alternatives to the proposed tax levy such as an installment agreement and the rules for obtaining a release of the tax lien.

• Certain properties are exempt from IRS seizure under the taxpayers Bill of Rights.

• Legal costs may be recovered if you win in court against the IRS and the burden of proof may shift to the IRS during court procedures with respect to factual issues relevant to determining tax liability. The IRS must also issue a tax refund of overpaid tax and must provide at least 30 days notice prior to altering, modifying or terminating and installment agreement.

While this is an abbreviated overview of the IRS tax payer's Bill of Rights, many of them can help and possibly prevent you from owing the IRS an enormous amount of penalties and fines after the IRS Audit. It is important that every citizen get treated fairly and equally. It is important that you always know your rights when dealing with an IRS Audit.

Preparing for an IRS Audit

When preparing for an IRS audit the key is to not be scared or act in haste. Read over all documents thoroughly, do some research and then begin to prepare. Familiarize yourself with what type of audit you are going through, what the IRS is requesting and why you filed the way you did. If you are unclear about anything, contact an accountant, attorney or anyone else who is registered to practice in tax court.

There are some common courses of action, which the average taxpayer is unaware of. First, you can tape record your audit meeting, but you have to notify the IRS within ten days of the tax audit meeting. Another item that you will want to educate yourself about is the ability to appeal the decisions, such as tax liens, tax levies and property seizures. Perhaps the IRS is lacking crucial information pertaining to your case, or maybe you are eligible for hardship relief.

While it isn’t necessary to appoint an accountant or registered agent, if you do enlist the help of a professional, you should give them “power of attorney”. This could be to your advantage because you wouldn’t be required to be at the meeting unless subpoenaed by the IRS. If this is the case, your registered agent can stall the process by needing to confer with you on some issues since you are not required to be present. This gives you the upper hand by giving you time to rebut the claim without being placed "on the spot".

Generally, the IRS tax audit notice will provide you with details on which part of the return is being questioned. Only provide that amount of information to the IRS. Do not volunteer or provide more documentation that what is being asked for. A simple measure, but one that many people overlook is making certain that the documentation is in the order of the request. For example, perhaps the IRS wants receipts for itemized deductions A, B and C, and they want copies of your bank statements for all of 2007. When preparing your file for your face-to-face audit, have copies, not originals, in the order of the request. Have on top the receipts for itemized deduction A, B and C labeled as such. Then follow that with copies of you bank statements from January through December in order. Paper clip those together with your request letter on the top. Appearing disorganized to an auditor will be to your detriment. The auditor will assume that your business is handled in an unorganized fashion and may feel that more mistakes may be found, which will result in higher tax penalties benefiting the IRS. The auditor may then extend the scope of the investigation. While many of the actions that you will take to combat the IRS audit, each are of high importance and can greatly affect the results. Take your time and be prepared.

Ways to get your IRS Audit Penalty Dismissed

If you asked the IRS for tax advice, and the advice that you recieved resulted in an audit, then you may not have the tax penalty any longer. They key will be to provide accurate tax information when the IRS asks for it and show proof that you received erroneous advice.

While it is our responsibility to be informed before filing our tax return, even if we need to seek the advice of a professional, if you have made an honest mistake you may be able to have the penalty dropped. In order for this to be successful, you would need to send the IRS a check for payment of the tax and interest due, along with a letter explaining how the mistake happened. Also, ask to have the penalty eliminated. If the explanation is clear and it is easy to understand how this could be an honest mistake, the IRS may relieve you of the penalty.

There are other ways that you can avoid a tax penalty. For example, you can show that you had substantial authority for the treatment of a given tax item. To show the substantial authority some research may be needed. Research the Internal Revenue Bulletin, Court Cases, Private Letter Rulings issued by the IRS and congressional reports. Once you have found a document pertaining to your situation, and making sure that is supports your position. Be sure that the documentations that you use has substantial relation to the weight of authorities supporting the opposite tax treatment. You can then submit the documentation to the IRS along with a letter as to why you took the position you did and how your documentation reflects your situation.

You can always appeal the IRS’s decision along with taking their decision to tax court. You have the right to representation. Additionally, the period of time while you are appealing the decision your penalty will be suspended until the ruling on your case. The tax penalty for filing a fake tax return is not based on your liability and will be assessed immediately and added to any other penalties incurred.

Staying informed, conducting research and seeking advice is the best way to combat an IRS audit after it happens. Being as truthful and forthcoming as possible will aid you in the process but with caution to not provide the IRS with any more information than needed. From a letter, to some research, all the way to tax court, you have the right and the opportunity to have your case heard and ruled on by an independent party.

How Large Deducitons Play into IRS Audits

If you anticipate claiming large deductions, there is nothing wrong with that as long as you have the receipts to prove it. If your tax deductions exceed the average amount of deductions for your income level, then you may get audited. Additionally, if you have an excessive amount of itemized deductions, you may fall into a high-risk category therefore raising your chances of getting audited. While the formula used is secret, we do know that a large amount of Itemized Deductions places you in the higher probability category.

When you file your return with the IRS, a secret computer score, known as the Discriminate Information Function (DIF), is immediately used to determine whether additional taxes, fees, penalties or fines could be collected. If the DIF score returns high, you are more likely to receive an audit.

An area that most taxpayers don’t even think about as being a high-risk error in reporting, that may get them audited, is the failure to report alimony as income. When a former spouse pays the alimony, they claim it on their taxes. Likewise, you should also claim it as income. Failure to do so will result in a high-risk score, and we know what that means by now. Since the other party generally reports it, catching such errors is relatively easy.

The IRS doesn’t usually just pick taxpayers to audit. Since the IRS has little resources and to boot, they are understaffed, choosing returns that will yield the highest rate of return in the way of fines and penalties is essential. The IRS has budgets and expenses, like any other business; therefore they must cover their expenses without passing the costs of doing so on. There is a fine balance between not allowing people to get away with underpayments, which would bankrupt our system, but on the other hand not spend the taxpayer’s money frivolously. This is why the IRS has the computer system and formula available to them, to ensure that they are auditing cheating taxpayers where money is available. While it may not be ideal, an audit may be scary, and it certainly isn’t pleasant, if the IRS did not put in place checks and balances imagine what that would do to our taxes. Our individual taxes would continue to rise until the system would entirely break, leaving the taxpayers without the common things everyday that we take advantage of paid for by tax dollars. No one would be afraid of the repercussions of being dishonest on their tax returns, and very little would pay.

HOw the IRS determines who will get an Audit

If you have received a notice that you are going to be audited by the IRS, don’t panic. There may have been several reasons for the selection. Perhaps an employee was angry and called you in, or your type of business may be a test selection for your area to compile data on the average amount of deductions etc. Generally however, audits are determined by a computer system and calculated by a numerical number. You have the right to ask why you were selected for an audit.

When the IRS receives your filing, the information is placed in a computer. The computer then uses a secret formula to “score” your return. While we don’t know exactly what formula is used, we do know some of the items that could make your “score” go up. Think of the score as a percentage that the computer gives back showing the likely hood of a mistake or cheating. Most of the time, the higher scores are a result of how far above or below average each line item is. For example, your score may go up if you have reported a lower than average gross profit margin compared to other businesses in your industry. Other items that can make your score go up include a high auto expense, high business use of automobiles, the number of automobiles used in your business, high travel and entertainment deductions and little or no profit from business operations.

Interest has recently been added to the high-risk audit item. Interest can be claimed as either business or personal use. The IRS has added that, which results in an IRS auditor assuring that the interest was in fact business and not personal.

It simply comes back to the higher the number; the more deductions that you have that vary from the average or norm. When this is computed, the IRS sees a greater chance for an error on that return. The returns with the highest numerical score get chosen first for the audits.

Remember that it is your right to know why you are being audited. Aside from the computer numerical system, there are other reasons that you may be getting audited. It could be an informant; your relationship with another audited taxpayer, being part of a targeted special group, or part of an IRS trial such as auditing all employers who use contract labor.