You pay your fair share of taxes.
In fact, you may even pay more than your fair share in an effort to steer clear
of even borderline tax-avoidance techniques, filing a cleaner return to reduce
your chances of being audited. Few things cause the cold hand of terror to grip
Americans as much as the receipt of an envelope bearing the return address of
the IRS Audit Division. And more prosperous Americans are facing audits today.
The IRS has emphasized its scrutiny of affluent taxpayers in
the past few years. The U.S. Treasury’s inspector general for tax administration
stated in July 2006 that the examination coverage rate of high-income taxpayers
increased from 0.86 percent in fiscal year 2002 to 1.53 percent in FY 2005.
Moreover, the examination rate for high-income tax returns based on 1040 forms
filed with Schedule C rose from 1.45 percent to 3.52 percent.
Why should an audit notice cause such fear? Generally speaking,
an audit is a process whereby a taxing authority merely seeks to verify the
accuracy of a filed return to determine that the correct amount of tax was paid
or refunded. However this process also allows an auditor to rake through the
details of one’s financial (and sometimes personal) life.
The procedure ranges from cursory information requests to
in-depth interviews and, in extreme cases, a field visit by an auditor to a
taxpayer’s business. Depending on the level of involvement and what the examiner
discovers during the audit, the end result can lead to a tax refund, or, more
likely, a tax increase, penalties, interest and, in the worst cases, criminal
investigation, prosecution and prison.
The IRS closely guards the secrets that can trigger an audit.
Some investigations are prompted when a taxpayer claims a deduction outside of a
standard range for similar taxpayers. Sometimes one is triggered by a
discrepancy between tax-year filings or even a tip from an informant. The
taxpayer normally becomes aware that he is the subject of an audit with an
opening letter from the taxing authority containing an Information Document
Request (IDR).
Now what do you do? In our collective 32 years of experience at
the IRS, we have come to appreciate the wisdom in the old saying that the lawyer
who represents himself has a fool for a client. The same applies to the naïve
taxpayer.
A number of clients who began the process without competent representation were so distracted that business suffered. |
An audit can seriously impact your business activities, and it
can also be a stressful experience that drains your personal life. A number of
clients who began the auditing process without first obtaining competent
representation have later stated that, once they realized how demanding and
detailed the audit process is, they were so distracted that business suffered.
Some felt a tremendous impact on their personal lives, which was reflected in
strained relationships at home.
When you receive an IDR, your first action should be to
identify an authorized and competent tax practitioner to represent you.
Initially, go back to your tax preparer and find out if that person is
sanctioned to represent clients before the IRS. Three categories of
professionals meet this standard: enrolled agents, certified public accountants
and tax attorneys. A quick meeting will either provide you with confidence,
inspired by having a knowledgeable ally with an interest in your situation, or
quickly convince you of the need to seek new, independent representation,
because your ultimate goals may conflict with those of your original
preparer.
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