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Surviving An IRS Tax Audit
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Surviving An IRS Tax AuditDaniel Dobbs2025-03-06T09:13:03-08:00
As “1099” personnel, agents, and loan officers, we qualify for tax deductions that “John Q taxpayer” doesn’t.
Both are also targeted for more tax audits, which is stressful & intimidating.
Knowing the process and developing strategies can mean the difference between coming out unscathed, paying $$,and being subject to more audits.
The Audit Starts with a Letter (IRS Form 4564).
It’s an “Information Document Request” and may be the first of several you receive.
Form 4564c requires you to gather requested records for review by an IRS revenue agent. If you receive an audit letter, you should immediately see your CPA, Enrolled Agent, or Attorney.
Aside from their knowledge, all three have additional assets you do not have. They are not emotionally involved in the problem and are better equipped to be part of the solution.
The audit may be random in nature, or your return may have been selected because you are part of an industry the IRS is targeting (i.e., “1099” real estate salespeople).
Or possibly one (or more) of your deductions is outside the norm for your industry.
The auditor begins by conducting interviews and subpoenaing records from the taxpayer and possibly third parties (e.g., your bank, employer, etc.).
IRS auditors don’t have the authority to negotiate monetary settlements. They are just there to gather facts and documents. Anything you or your representative say is added to the auditor’s report.
Your representative can start by saying, “I ‘m not authorized to make representations on behalf of the TAXPAYER, but this is how I see it.”
The reason for the prefaced statement of YOUR representative’s words CAN NOT… be held against YOU should the case proceed to an appeal or tax court.
When complete, the auditor will discuss the findings. If the result is unfavorable, DO NOT persuade the auditor to take a more favorable approach.
You appeal. Next, the auditor will forward to the IRS Appeals division. You (and /or your representative) can present new arguments and evidence at the appeals hearing.
At all times, be courteous. Arguments presented courteously and logically will generally generate something in your favor.
If there are no new facts or arguments, you’ve raised the risk of losing on appeal. If an Appeals Division rules against you, a 90-day deficiency letter will be prepared by the appeals officer.
You’ll generally be asked to sign an extension. This is where you say NO!!! This gives the IRS appeal department more time to find more facts & documents to substantiate the IRS position the IRS.
Remember, there is a 3-year statute of limitations from when your tax was assessed.
If your case is really strong, the agent at the Appeals or Tax Court level may negotiate a discount that could go as high as 80% or may concede that the IRS case is not there and dismiss it.
If a tax deficiency is owed, and it has been more than three years since it was assessed, it can generally be discharged in bankruptcy.
The IRS has to make the assessment within those 3 years (barring fraud and tax evasion committed by not declaring various income in your return in the first place).
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