Understanding The IRS Office Audit

Where would you guess an IRS office audit is conducted? That’s right! An IRS office audit takes place in an IRS office. Less experienced IRS employees (typically an IRS tax auditor) usually carry out this type of audit. Office audits are mostly concerned with simple tax matters and can be limited to a few simple items on your tax return.

Now do not be fooled. IRS office audits are more complex than IRS correspondence audits, but are not complex enough to require a Field IRS Audit. Most IRS office audits concern common items found on tax returns, such as exemptions, travel and entertainment expenses and casualty losses.

If you find yourself the subject of an IRS office audit, you will receive a letter (sometimes referred to as an “appointment letter”) requesting you to bring in documentation supporting the tax items on your tax returns that are in question. Depending on just how much documentation the IRS is requesting, you might be able to send necessary documents through the mail. Obviously if you can handle the matter this way, I would. If this option is not afforded to you, suck it up and bring to the appointment all tax documents that the IRS tax auditor requested. If the items on your tax return are legit and you can back that information up, you obviously have nothing to worry about. Now if that’s not the case…be ready to pay up.

Cheers!
-Taxus

For information on:
Correspondence Audit—see this past article.

Understanding The IRS Correspondence Audit

As stated in a previous post, the correspondence audit is the simplest type of IRS audit. During this audit, the IRS sends the taxpayer (via mail) a request for proof of a particular deduction or exemption taken by either completing a special form or sending photocopies of relevant financial records. On a positive note, the taxpayer has the greatest chance of coming out on top during a correspondence audit.

If you find yourself in the middle of a correspondence audit, please don’t panic. You should know that the IRS conducts hundreds of thousands of correspondence audits every year. This type of audit is the least threatening IRS tax audit for the taxpayer….something you should keep in mind before you have a panic attack when you receive that letter in the mail.

This Correspondence audit process generally begins when a taxpayer receives a notice from the IRS that the taxpayer’s tax return has been changed. Most correspondence audits are going to be conducted through the IRS service center where the tax return was filed.

When you receive this letter in the mail, do not immediately send a check to the IRS and do not simply ignore the correspondence audit letter as if you never received it. I mention this because these are two mistakes often made during a correspondence audit. Just because the letter comes from the IRS does not necessarily mean that they are correct in their findings. Everyone can make mistakes, even the IRS. Only after you have conducted a thorough review, comparing a copy of your tax return with the IRS notice, can you be certain that the IRS is either correct or incorrect.

As far as ignoring the correspondence audit….yeah, bad idea. Ignoring an IRS notice will not make the problem go away. If you do not respond to the IRS notice or IRS correspondence audit letter, the IRS treats the lack of response as an agreement with its computations and you will be assessed the additional taxes owed. Failure to pay the additional taxes will result in penalties and interest against you.

If you do happen to disagree with the IRS correspondence audit notice, you have the option to appeal it. This procedure is explained in the notice you receive from the IRS. In most circumstances, your written explanation must be sent to the IRS within thirty days of the date of the IRS notice. Your response should include copies of any tax documents that will support your appeal.

All in all, a correspondence audit is not a big deal. If you receive that notice in the mail, take a deep breath and calmly address the situation. As mentioned before, you might end up owing a little more on your end or you might find that the IRS has made a mistake and you own nothing. Trust me, things could be worse.

Cheers!
-Taxus

What Can I Get You?

If the IRS was a local pub, they would have several different audits on tap. How about a nice smooth Coorespondence Audit? ...Or better yet, how about a pint of something more stout...say a Field Audit? Whatever you fancy, I am sure the IRS will serve it up nicely.


You see there are many types of IRS audits. Some types of IRS audits are less aggressive than others. As no surprise, most types of audits are designed to increase the tax bills for the tax payer and increase income for the IRS.


Four common types of audits include:


Correspondence Audit: The correspondence audit is the simplest type of IRS audit. During this audit, the IRS sends the taxpayer (via mail) a request for proof of a particular deduction or exemption taken by either completing a special form or sending photocopies of relevant financial records. On a positive note, the tax payer has the greatest chance of winning a correspondence audit.

IRS Office Audit: An IRS office audit is done in an IRS office and is mostly about simple tax matters.

Field Audit: Field audits are usually the most complete IRS audits and are performed by experienced IRS officers. I am afraid to say that a field audit usually results in additional tax bills for the tax payer.

IRS Repetitive Audit: An IRS repetitive audit is an IRS audit conducted on the same tax payer over and over. If no additional tax bills results from an audit and the IRS wants to audit the same tax payer again, the tax payer can ask the IRS to discontinue the IRS audit on the ground of IRS repetitive audit.

This week I will be discussing these four types of audits in further detail. Stay tuned.


Cheers!
-Taxus

Raising a Red Flag...

Many actions taken when preparing tax returns can eventually raise a red flag. For obvious reasons, the IRS refuses to come out and explain how it goes about selecting tax returns to audit. However, some trends can be observed. For example, if your tax return included a Schedule C detailing any self-employment income, you are three times more likely to face IRS questioning. In addition to this, the IRS has even gone so far as to state that it will be stepping up audits of filers who run their own unincorporated businesses.

Explanation: Tax officials believe that many self-employed individuals underreport their income. A major factor contributing to this attitude is that this type of income is difficult to verify (i.e., the IRS cannot double-check much of this type of income in the way it can verify wage income via an employer-issued W-2). You can’t blame them for having this rationale. No offense, but if it was up to you to voluntarily report your income in an accurate manner, all the while knowing that it will be difficult for me to verify your numbers, I wouldn’t trust you either.

So don’t be shocked if you are audited. It’s not a big deal and is actually nothing to worry about as long as the figures you are reporting are legit. Now if you lied on your tax return…you might be screwed.

Cheers!
Taxus

IRS Audit

First, a little history lesson. In 1998, the IRS Reform and Restructuring Act was passed, ordering the IRS to focus more on taxpayer rights instead of collection activities. As a result, about one of every 79 tax returns were audited that year. This dramatic decrease continued, and by 2003, according to IRS data, only one of every 150 individual taxpayers were audited.

I am afraid this positive trend did not continue though. The IRS soon returned to their wicked ways and by 2005, the number of audits hit it’s highest since 1998. The 2006 tax year saw 1.28 million individuals audited.

One big reason this happened is because taxpayers, mainly those that skew their numbers purposely, became too bold. More and more tax errors were being made and the IRS decided to step up collections again. So the same lawmakers who once demanded the IRS give taxpayers the benefit of the doubt began applauding the new aggressive approach. Members of Congress are hoping that enhanced enforcement efforts will help close the $345 billion tax gap. According to 2001 figures, that amount represents the difference between what taxpayers should have paid and what they actually paid. So, without some help from additional IRS collections, Congress would have to consider raising taxes.

But don't let fear of a potential audit discourage you from filing for credits or taking legitimate deductions. Even though some actions taken on your tax return are likely to raise a red flag, that doesn't necessarily mean you'll be audited. Even if your return is questioned, it's not absolute that you'll end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, you’ll have nothing to worry about.

In the end, doing your homework and backing this work up will pay off in a tax examination. Be confident in what you entered. Trust me, you’ll find this is easy if you keep good records to support your tax return entries.

Cheers!
Taxus

Jackson Hewitt? Did You Not Hear What Happened??

Just the other week I took a call from a taxpayer who had been audited by the IRS for 3 consecutive tax years. The person on the phone says to me, "I don't understand how mistakes were made. I had Jackson Hewitt handle the tax returns for those years."

Ahhhh. Now I understand. Apparently the taxpayer had not heard the news from this past summer. In April of 2007, the operators of more than 125 Jackson Hewitt Tax Service Inc. tax preparation offices were sued by the U.S. government. Jackson Hewitt was accused of cheating the U.S. Treasury out of more an $70 million through what the court ruled as a "pervasive and massive series of tax-fraud schemes." Ouch. That's not going to be good for business.

You have to understand, a lot of the tax prep offices employ people with no tax background and then run them through a crash-course on preparing taxes. In the end, they claim to have gotten you money back on your returns you wouldn't have received without their help. While this is true, you were actually getting money back you weren't entitled to in the first place. So now you are going to be out the money it cost to have the company prepare your taxes, you will have to pay the money back you received from the U.S. Treasury, and will now owe penalties and interest on that money you owe.

If you have several years of tax returns that need prepared, it is best to seek out the assistance of a professional firm with TAX and IRS EXPERIENCE. Don't rely on these tax prep chains that promise more money on a tax return. It will only cost you in the end.

Cheers!
-Taxus


As always, you can find an array of articles by perusing this site or by checking out my coworkers' individual sites:

IRS MIND
Tax Negotiation
Tax-Thoughts
Little Miss Tax Lass
Tax Settlement


And if you need the assistance of a tax resolution firm, seek out the best: Effectur, Inc.

Santa + Audit = HO! HO! NO!

That's right kiddies, Santa has been paid a visit by the IRS. Seems our Internal Revenue Service has a "Naughty" list of their own. Check out this video that a few of my collegues made: Santa's Audit.

Cheers!
-Taxus