The IRS has doubled their audit force. The new Health Care bill has funds specifically ear-marked to increase the number of IRS auditors even more. What does this mean for you? You have a much great chance of being audited.
If you do get an audit notice, there are five things you must do right away. We call them STATE your case to win.
S – Stay calm. This may be the hardest to do because getting a notice is understandably unnerving. But remember this: As emotion goes up, intelligence goes down. And right now, you need to act and be smart.
T – Take action. It’s awfully tempting to just stick the offending notice in a drawer and forget it. The problem is that the IRS won’t forget it. The longer you wait, the less negotiation power you have. If you wait too long, the IRS will simply complete a tax return for you, with no deductions and lots of penalties.
A – Advisors. The best results generally happen when you aren’t even there – it’s just the auditor and your trusted tax professional. At the very least, prepare for the audit with a tax professional who is experienced in audits. There are three types of representatives you may consider: (1) An Enrolled Agent (2) A CPA or (3) A Tax Attorney.
I’m a CPA, so granted I’m going to be biased. But after seeing the disastrous results for a client a year ago with an EA, I have to share my opinion. There are plenty of good and honorable EAs out there. The problem that can occur is that an EA is simply a license given by the IRS. There is no code of ethics beyond following the tax law. So, they can (and in this case a year) sometimes willfully and maliciously share your confidential information with others. Unfortunately, there is no recourse for the EA (other than civil legal action) for someone who does that.
A CPA practices before the IRS just like an EA does. They will have a required amount of education in subject matter beyond that of just tax, such as business law, auditing and financial statements. They also have regulatory boards that guarantee your information is kept confidential. In many states, your communication with your CPA is the privileged the same way that attorney-client is. A CPA can not turn over your confidential information to someone else just because they get mad at you. Or if they do, they will lose their license and be publicly censured. A CPA may cost more than an EA if you have an audit, but you do have more assurance that what they do will be in your best interests, to the best of their abilities.
A Tax Attorney also practices before the IRS. There is a high level of confidentiality and assurance that what you do and say is kept just between you. You may not want a Tax Attorney in the beginning stages of an audit and through the appellate process. But if you go to Tax Court, you’ll probably want to have a Tax Attorney at that point.
T – Technique Guides. That’s “technique” as in Audit Technique Guides (ATG) that the IRS agents are trained on. Think of them as their scripts to use to interrogate…ahem…interview you. It’s never been more true than with an IRS agent: You have one chance to make a first impression. If you and/or your representative are fully versed and have the answers they need, it’ll go well. If you volunteer information you shouldn’t, it’s not going to go so well.
Now here’s the good news. Based on the way the audit notice was worded, and the things they asked for, we can tell which ATGs the auditor has pulled his game plan from. We can know exactly what he’s going to ask you and we can be ready for it.
You should put more time in preparation for that first meeting than you do for any other aspect of the IRS audit. It will pay off big time.
E – Exam. Then, and only then, are you or even better your tax representative ready to go into the first IRS interview.
Got an IRS audit notice? Remember to watch your STATE.
S – Stay Calm.
T – Take Action
A – Advisors
T – Technique Guides
E – Exam