I Am Being Audited, What Do I Do?

The IRS audits tax returns to confirm that the tax reported on the return is correct.  Being selected for audit does not always mean the IRS thinks you made an error or were dishonest.  The overwhelming majority of taxpayers file accurate returns, and they have a right to expect fair and efficient tax administration from the IRS.

The IRS selects the returns it will audit using a variety of methods, including: (a) existence of evidence the taxpayer has participated in an abusive tax shelter; (b) using a computer scoring system to flag returns that contain certain deductions and other characteristics indicative of errors or fraud; (c) the size of corporate taxpayers (large corporations get audited every year); (d) information matching of returns filed by taxpayers with information statements such as W-2s and 1099s filed by employers and banks; and (e) existence of related issues or transactions with other taxpayers under examination.

If your return is selected for audit, you have rights.  The IRS trains its employees to explain and protect your rights through the course of the audit.  Your rights include: (i) a right to professional and courteous treatment by IRS employees; (ii) a right to privacy and confidentiality about your tax matters; (iii) a right to know why the IRS is asking for information, how the IRS will use the information and what will happen if you do not provide the requested information; (iv) a right to representation, by yourself or by an authorized representative; and a right to appeal any disagreements, both within the IRS and before the courts.

An examination of your return may be conducted by mail or through an in-person interview and review of your tax records. The interview may be at an IRS office (office audit) or at your home, place of business, or accountant's office (field audit). You may make audio recordings of interviews, provided you give the IRS advance notice. If the time, place, or method that the IRS schedules is not convenient, you may request a change, including a change to another IRS office if you move or the business records are kept there.

The audit notification letter you receive from the IRS will tell you what records will be needed. You may represent yourself or have someone represent or accompany you to the audit.  If you are not present, your representative must have proper written authorization (power of attorney). The auditor will explain the reason for any proposed changes.  If you agree with the changes, the audit will end at this level.

If you do not agree with the IRS auditor, you have the right to appeal.  Appeal rights are explained by the IRS auditor at the beginning of each audit. More about your appeal rights in the next Blog.  Please call or email me if you have any questions about the IRS audit process at   Jsenney@pselaw.com or 937-223-1130. 

AND ONE MORE THING.  Don’t forget capital loss carryovers you have from prior years.  You can only deduct $3,000 a year of capital loss against active income.  But you can deduct an unlimited amount of capital loss carryover against capital gains.  So make sure you consider realizing some capital gain to offset against your suspended capital losses.  If you are holding appreciated stock that you could sell at a gain, but you want to retain such investment, consider selling the stock to realize the gain, and then repurchasing the stock.  The wash sale rules only apply to losses so you can sell and repurchase at the same price on the same day.  Give me a call or email at Jsenney@pselaw.com or 937-223-1130 if you want to talk about year-end tax planning.

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Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

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