What to do when the Auditor Stops Contacting You

My auditor hasn’t contacted me in a couple of months, what should I do?

In this scenario, it’s best to do nothing at all. The IRS doesn’t have an unlimited amount of time to finish your audit, they have 28 months since the date you filed your return to complete the audit. If the auditor is no longer contacting you, there is no point in trying to reach out to them. Why help them if they’re running out of time?

There are a couple of different reasons that the auditor has stopped contacting you. Although not likely, the auditor in charge of your case could’ve been transferred or fired mid-audit. Your case may also be dormant in a pile of other cases awaiting processing. If you’re really lucky, the auditor may have missed the deadline to close your case. You don’t ever want to remind the IRS to finish your audit nor do you want to give them more information than they request, so if the auditor doesn’t contact you, don’t go out of your way to reconnect.

Only in one instance should you take action after not receiving word from your auditor over a long period of time. The auditor is required to cut off contact if the IRS finds sufficient evidence of tax fraud and refers your case to the IRS Criminal Investigation Division. Unless you intentionally commit fraudulent activities and until you’re contacted by an IRS special agent, you shouldn’t have anything to fear from the auditor ending correspondence. In the situation that a special agent does contact you, however, seek out professional representation from the Law Offices of Jef Henninger immediately.

Appealing the Audit

The IRS has finally completed poking through your financial history and has concluded your audit. Upon completion, you will receive an IRS examination report in the mail that details all the proposed changes, penalties (with interest), taxes, and possibly even refunds you will receive.

If you agree with the findings of the IRS, all you have to do is sign and return your copy of the report. Pay your fines, and your audit problems are over.

If, however, you disagree with the findings, you have the right to appeal the IRS’s conclusions.

How to appeal an audit

The first step in appealing your audit is refusing to sign and return your copy of the examination report. Doing so results in the IRS sending you a 30-Day Letter that lists the steps of appealing the audit. You are given 30 days from the date listed on the letter (not the day you received it) to file your official protest, although extensions are usually given upon request. The IRS requires that your protest includes each of the following:

  1. Your name, address and a daytime telephone number
  2. A statement that you want to appeal the IRS findings to the Office of Appeals
  3. A copy of the letter you received that shows the proposed change(s)
  4. The tax period(s) or year(s) involved
  5. A list of each proposed item with which you disagree
  6. The reason(s) you disagree with each item
  7. The facts that support your position on each item
  8. The law or authority, if any, that supports your position on each item.\
  9. The penalties-of-perjury statement as follows: “Under the penalties of perjury, I declare that the facts stated in this protest and any accompanying documents are true, correct, and complete to the best of my knowledge and belief.”
  10. Your signature under the penalties of perjury statement

Accepting your request to appeal

Note that the IRS is not legally required to grant your request for appeal. Your chances of the IRS approving your appeal request are likely if you can prove any of the following:

  • You did not receive proper notice for the audit
  • The IRS ignored documents that would reduce any taxes or penalties you owe
  • You have new documentation to support your case
  • You filed an accurate tax return to replace the tax return filed by the IRS during a year in which you failed to file
  • The IRS made math errors regarding the amount of tax owed

Denying your request to appeal

Once you receive IRS Form 4549 that details the adjustments to your tax return, you must be certain that you do not want to appeal before you respond to the IRS. Your request to appeal can be denied if you’ve already made a payment or reached a closing agreement with the IRS. Your appeal can also be denied if a United States Tax Court issued a final determination of your owed taxes.

Before you file for an appeal, you must also be sure that the reason you’re appealing is viable. Your appeal must be in accordance to tax laws and relate to a disagreement with the IRS’s conclusions. Cases cannot be appealed for moral, religious, political, or constitutional reasons.

Your letter of protest to the IRS should make it clear which changes you disagree with and why. It’s important to include as much documentation that supports your claim as possible. You can expect a response from the IRS in approximately 30 days, however you should be aware that any penalties and interest you owe from the audit will still accumulate during this process.

Depending on the amount of money you owe, the appeals process can proceed in one of three ways.

You owe less than $2,500

If the IRS claims that you owe less than $2,500 in taxes, you can take your appeal straight to the auditor. This will not go to the IRS Office of Appeals but will be handled by the agent that conducted your audit. A request by phone or in person should be enough, but it would be smart to write a protest letter anyway or fill out IRS Form 12203, the Request for Appeals Review.

You owe between $2,500 and $25,000 (Small Case Request)

If the IRS claims that you’re responsible for $2,500 to $25,000 in tax liability, you can request an informal appeal called a small case request. Although it is informal, it must still all be in writing. You can either fill out IRS Form 12203 or write a letter of protest that must include your contact information, tax ID numbers, a summary of the disputed items, and a statement of intent to appeal. IRS Form 12203 is a form that allows you to list out any objects on the IRS examination report that you disagree with and why. The form will ask for your Taxpayer Identification Number which is your Social Security Number if you’re filing as an individual or your Employer Identification Number if you’re filing as a business. Once you complete the form or the letter of protest, have it mailed to the office that conducted the audit.

You owe more than $25,000 (Large Case Request)

In any case in which you owe upwards of $25,000 to the IRS, known as a large case request, your only option to appeal is to write a formal letter of protest. The letter must contain:

  • Your name, contact information, and SSN
  • A statement of appeal of the IRS conclusions
  • A list of the findings you disagree with and explanations as to why they are incorrect
  • The tax periods involved
  • Documents supporting your explanation
  • A copy of your 30-Day Letter
  • A copy of your examination report
  • Your signature with a penalty under perjury clause

Send the letter to the local IRS office and an appeals officer should respond within 90 days. If you do not hear back within 90 days, follow up with the Office of Appeals to get an update on your appeal.

The IRS Office of Appeals

The IRS has an independent branch that conducts appeals called the IRS Office of Appeals. This office is made up of experienced employees, most of them previously auditors, who evaluate examination reports and assess the taxpayer’s arguments. The original auditor plays no part in this process. The goal of the Office of Appeals is to resolve tax disputes and to avoid court. Unlike the auditor, appeals officers have no interest in fining you or raising funds for the IRS. Appeals officers work to avoid litigation and to compromise with taxpayers, not to uphold whatever the original auditor concluded. Once they approve your appeal request, the Office of Appeals will schedule a conference with you.

The Appeals Conference

After submitting your request to appeal, you generally have 60 days to prepare for the appeals conference. The appeals agent will contact you and arrange a meeting in their office. In preparing to make your case, you should be sure to:

  • Solidify any arguments you plan to make
  • Acquire a copy of the auditor’s file from the local IRS office (this is done by mail and can take up to a month)
  • Prepare and organize all necessary documents, statements, receipts, and forms that support your argument
  • Get professional help from a tax professional permitted to practice before the IRS

Organization is an important component to winning over the appeals officer. If you go into the hearing unprepared with a mess of unorganized files, you probably won’t get your point across nor will the officer be willing to listen. The burden of proof is on you, so you must make your case as clear as possible. Organize your documents—receipts, bank statements, cancelled checks, etc.— according to each item you disagree with from the examination report. File them into folders and provide a brief explanation as to why the auditor was incorrect on each item. If organization isn’t your strong suit, hiring a bookkeeper is recommended.

The conference with the appeals officer is informal. There will be no testimony or procedures for evidence like in a trial, nor does the IRS record these meetings. You can record it yourself if you wish to as long as you notify the IRS several days in advance. This isn’t recommended, however, in that the officer will view you as difficult and be less willing to cooperate.

When negotiating with the appeals agent, keep in mind that the Office of Appeals settles disputes on what is known as the hazards of litigation. The hazards of litigation is the chance that the IRS would lose in tax court. If you can convince the officer that your case would win in court, they will lower your tax bill to avoid an unsuccessful case.

Once you prove your case, you should request that the officer waive or reduce the tax penalties placed on you by the auditor. The officer will be more lenient if you speak in terms of percentages as opposed to flat dollar amounts. Do not demand anything. This is a compromise, so you should be willing to pay at least part of the proposed adjustments. Your willingness to compromise will influence the officer’s willingness to compromise. Once you reach a settlement, the hearing is over.

You can then expect IRS Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Over-assessment, within your mailbox within the next couple of months. Before you sign and return the form, read it and reread it again. Signing the form prevents you from taking the IRS to tax court or take any further actions regarding your audit. Be sure that the numbers and reductions on the form match the compromise you made during the hearing.

If you still do not agree with the IRS’s findings even after the appeal, your only option is to take your case to the U.S. Tax Court.

Advantages of appealing an audit

The pros to appealing an audit are obvious. You can reduce and in some situations completely eliminate any extra taxes or penalties you owe to the IRS. The process is completely free, too, unless you hire professional help. Chances of a favorable outcome are also high. IRS statistics show that approximately 70% of cases are settled and lead to a 40% reduction in penalties originally assessed by the auditor.

The appeals process can also delay the due date of your assessed tax bill for months at a time, giving you more time to raise money or consider payment plans.

Disadvantages of appealing an audit

There are a few situations in which appealing an audit can potentially be harmful to you. Although it is rare, the appeals officer may find suspicious items on your return that the auditor had missed. The last thing you want to happen is to be criminally investigated on suspicion of tax fraud. If you are afraid of this happening, it would be smarter to just pay your tax bill or take your case directly to U.S. Tax Court. It’s also important to know that any penalties and interest placed on you during the original audit will continue to accumulate during the audit process. In the event that you lose the appeal you will have to pay even more than you originally owed.

Audits are generally frustrating, dragging processes that usually result in increased tax liability. Appeals, however, are not as complex and usually put money back in the taxpayer’s pocket. If you are undergoing an audit or need assistance in appealing the findings of the IRS, contact the Law Offices of Jef Henninger to assure the best possible outcome.

How do I avoid an audit?

There are many different reasons that you can be audited, but more times than not you will receive that dreadful letter in the mail from the IRS because there was a mistake on your tax return. There’s nothing you can do to prevent yourself from being randomly selected, however there are a number of precautions you can take to reduce the likelihood of being audited.

Make sure your information is correct

The most common reason people are audited is for inconsistent information on their tax return. If you file your return with one income on your return but your W-2 says otherwise, you will most likely be audited.

It is important to double check everything you write on your return. Make sure all of your math is correct, nothing is omitted, and everything is signed. Make sure you sign your return! Many people are guilty of this simple mistake that gives the IRS reason to take a closer look at your return.

Always double check your math. Math errors raise eyebrows, so be certain that your calculations are correct.

It is crucial that the income you claim matches the income reported on documents such as the W-2, 1099, and 1098. Underreporting income is a serious matter that can get you in a lot of trouble. Mistakes happen, just make sure this mistake doesn’t!

To verify that your information is correct, wait until you have all the necessary documents before filing your tax return. Gathering bank statements, income reports, and other financial documents make filing your return a whole lot easier. You’ll have a reference to work from to ensure your information is correct and it will be hard to forget any income with your financial records right in front of you.

Although the IRS has human auditors, most returns are examined by computers that analyze your tax return and search for errors and inconsistencies. It is crucial to double check everything you write on your return. If there is an error, the computer will catch it.

Maintain your records

Keeping financial records for both business and personal expenses can help you prevent an audit. Maintaining accurate books and records assures that your return will be accurate, preventing suspicion from the IRS. In the event that you are audited, keeping meticulous records can also be used as substantiation for any questions the IRS has. Financial records you should track include:

  • At least three years worth of tax returns
  • Checkbook stubs
  • Receipts from all purchases throughout the year
  • Property and taxable investment costs
  • Bills
  • Records of deductible items
  • Receipts and appraisals for any charitable contributions
  • Records of work-related expenses.

Small Businesses

Small business owners and self-employed individuals are some of the most at-risk for audits because they have the most opportunity to under-report income. If you’re a small business owner, it’s crucial that you don’t try to “push the envelope” and see how much income you can get away without reporting. If you really want to avoid the nightmare of an audit, it’s best just to be honest.

Businesses that deal primarily in cash are under more scrutiny from the IRS. Restaurants, bars, salons, taxi services, and other cash/tip based businesses are very likely to be audited because it is much easier to under report income when dealing in only cash. That being said, it is important to be consistent in your accounting method. Switching back and forth between cash and accrual accounting is a red flag to the IRS and will most likely trigger an audit.

One thing that the IRS loves to nail small business owners for is writing off personal expenses as business expenses. While ordering new business cards justifies a business expense, a vacation to Disney World does not. Be smart about what you write off as a business expense, because the IRS will come knocking if you decide that your personal expenses can be deducted. An easy way to keep your business and personal expenses separate is by having a separate account and card for each. It’s recommended to keep a journal of everything you purchase for your business and your reasoning why. Both these methods reduce the likelihood of the IRS auditing your business and will help you in the event of an audit.

Deductions

A simple way to avoid an audit is to make sure your deductions are in check. If you claim an usually high deduction given your income, the IRS will be suspicious. It’s important to know what constitutes a deduction. Gas money for your daily commute to the office does not justify a deduction, whereas a special trip to meet with a client in the next state over would.

Again, do not write off personal expenses as business expenses. If you work from a home office, don’t try to write off the new dishwasher as a business-related deduction.

A general rule of thumb is if you have to spend money on something to help you make money, it can count as a deduction. Don’t get carried away, though. The IRS won’t appreciate it, and you’ll pay for it regardless in the end.

Report your income accurately

Are you currently a small business owner who also does some consulting on the side? If so, be sure to accurately report all of the money you are bringing in across your different income streams.

As tempting as it may seem, never exclude a portion of your income from your tax return. When you do this on accident, it’s called negligence and can have minor but unfavorable penalties in the form of fines plus interest. When you do this on purpose, it’s called tax fraud and there will be harsh consequences such as a $250,000 fine and up to 5 years in prison.

The IRS compares your reported income to information collected from banks and employers to look for any discrepancies. Always make sure that what you report is accurate. Any error, whether by mistake or intention, can have you face fines that should’ve easily been avoided.

Dependents

If you or your spouse can claim dependents, make sure the dependents are only claimed on one tax return. This is a common mistake that can trigger an audit.

File your return electronically

The IRS says that the chances of you making a mistake on your return are dramatically reduced if you file it electronically. The IRS reports that the rate of errors on paper returns is 21%. The error rate for electronically filed returns, however, is only 0.5%. If you’re still filing on paper, it is highly recommended that you make the switch over. Less chances of an error means less chances of an audit.
The most effective thing you can do to avoid an audit is be honest. Lying on your return will never work out for you. As long as you file your tax return accurately, honestly, and on time, you don’t have much to worry about. Should you find yourself under audit regardless, contact the Law Offices of Jef Henninger, Esq., for professional assistance. You don’t have to face the IRS alone, we’re here to assure the best possible outcome for our clients.

Why am I being audited?

You’ve received a letter from the IRS notifying you that your tax return from last year is undergoing an audit and the first question that comes to mind is, “Why me?” Unless you’re intentionally committing a tax crime such as tax evasion or under-reporting your income, you probably won’t know beforehand why you were chosen to be audited. After your tax return has been reviewed by the IRS, there are a variety of different reason the return will be audited.

Auditor Examination

When a return is reviewed individually by an auditor, they may either accept it as filed or pass it on to an examining group if anything on the return raises suspicion. If the manager of the examining group also does not accept the return as filed, the return is given to an auditor for one final examination. At this point either the return will be accepted or the taxpayer will be audited.

Computer Analysis

The majority of audits are chosen by computers that conduct a statistical analysis of tax returns to determine the likelihood of the information on the return to be correct. The IRS uses a couple different computer systems such as the:

  • Discriminant Function System (DIF): This system analyzes a tax return and gives it a score, called the DIF score, based on how accurate it appears to be. The higher the DIF score, the more likely the return is to be audited. The IRS does not disclose the specifics on how this system works, but it is believed that many factors are considered with deductions and exemptions being of most importance.
  • Unreported Income Discriminant Function (UIDIF): This program determines the likelihood for a return to have unreported income based on an expense to income ratio. If the program finds that an individual or firm is spending significantly more money than it makes, unreported income is probably occurring, triggering an audit.
  • Information Returns Processing System (IRP): The third program the IRS uses information gained from third parties that are required to report taxpayer income to the IRS such as employers and banks. If the income listed on your tax return is inconsistent with the data given by the employer, you are likely to be audited.

Related Audits

If the IRS audits a tax return involving transactions with other taxpayers or businesses and that return had questionable items, it is likely that individuals and businesses associated with the suspicious return will be audited.

Random Selection

While this method is not used very often, the IRS does use computer screening and random selection to determine which returns will be audited.

High Income

Your income can determine the likelihood of the IRS auditing you. The more income you make, the more likely you will be audited. IRS statistics state that over half the audits conducted are for taxpayers making over $1 million per year. In fact, even if you make $100,000 per year your chances for being audited are much higher than average. High-income taxpayers claim more deductions and contribute more to charity, leaving more room for error on a return and more reason for the IRS to take a closer look.

Document Matching

The IRS will audit a tax return if the information provided on the return does not match other records. For example, if the income listed on a tax return does not match the income listed on a Form W-2, the return will be audited.
Whether you’ve been audited for inconsistent records, missing documents, or even randomly selected, you shouldn’t try to handle an audit all on your own. The Law Offices of Jef Henninger, Esq. provide professional representation during audits, taking the burden off your shoulders and ensuring the audit settles in your favor.