One provision of the Inflation Reduction Act is to increase funding for IRS enforcement, which will include hiring around 87,000 new agents. The extra revenue stemming from additional tax audits is projected to lower the deficit by more than $200 billion over the next decade.
Tips To Avoid An Audit From The IRS
With more employees, the idea is the IRS can focus more on high-income earners and ensure they aren’t dodging taxes. So if you get a notice in the mail from the IRS, what should you do? And what can you do to avoid IRS actions or an audit? I got together with CPA Jeff Webb and came up with some easy-to-follow rules:
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Don’t Ignore It
The problem will not go away by itself. If you ignore an IRS audit of any kind – mail audit, office audit, field audit – several things can happen, none of them particularly good for you. But don’t panic. Read the notice carefully to determine why you received it.
Sometimes it's informational rather than adversarial. If you don't understand the notice, contact a CPA to help you deal with it.
Also, be careful when trying to resolve the notice yourself. You only want to provide the IRS the information that they need to close your case and move on.
My suggestion is not to try to communicate with the IRS yourself; you might find yourself being questioned without really knowing the ramifications of your answers. Always use a professional to communicate with the IRS, even if the issue seems mundane.
Make Sure That Your Tax Return Is Complete And Accurate
You can avoid all the headaches just by doing the right thing from the outset. Along with filling out your tax return thoroughly and to the best of your knowledge, keep good records of everything you've reported.
If you owe tax on the return or from a notice or audit, you have a few choices:
- Pay your tax
- Set up an installment agreement with the IRS
- If you believe that you will never be able to pay the amount owed or that it would do irreparable financial harm to you, you can file for an Offer in Compromise (OIC). The OIC allows you to negotiate the payoff of your tax debt with the IRS. Just know that the OIC does require you to provide a substantial amount of information about your assets to the IRS to prove the irreparable harm or inability to pay.
Avoid Taking Risky Positions On Your Tax Return
Certain types of taxpayers are more prone to audits than others. For example, taxpayers who file a Schedule C for their sole proprietorship tend to draw much more scrutiny than other taxpayers. Schedule C filers are as much as 1600% more likely to be audited than, say, an S corporation, which in general does not pay any income taxes.
(Instead, the corporation’s income and losses are divided among and passed through to its shareholders, who must then report the income or loss on their own individual income tax returns). Moreover, Schedule C filers have a greater than 94% chance of seeing their tax return changed – rarely in their favor.
Avoid Clashing With Your IRS Agent
Try to be forthright with them. Better yet, speak to the IRS only through a representative if at all possible to avoid this issue. Many an audit has gone south when a taxpayer gave the agent reason to believe that something was amiss.
Provide them with information that they request and do so as nicely as possible. If a confrontation is called for, let your CPA handle it.
Exercise Your Right To Appeal
Lastly, we sometimes lose our audit and disagree with the agent's findings. This is not the end. You have an appeal open to you and you should appeal everything that you disagree with from the examining agent. IRS agents make mistakes all the time and sometimes the tax laws are so vague and complex that they need interpretation.
Your first step is to appeal to the IRS appeals section. Your second step will be to appeal to the Tax Court. It is rare that a case finds its way to the Tax Court, but it is sometimes necessary if the IRS is taking an unreasonable position or is incorrectly applying the law. Whatever the case, know that you have recourse available to you even when an audit goes awry.
Conclusion
Even if you’ve reported every dollar, you can still be audited. Auditors are not your enemies, but their methods are imperfect, and it’s easy for taxpayers to become frustrated during an audit process. Just try to stay calm, be proactive and not defensive, be forthright, and consult a tax professional to help you through the process and to make it less arduous.
