TIP #11: The IRS Audit… The Best Offense and Defense
IRS Agents are no longer limited to in person interviews. An agent can simply mail you a demand letter and you are required to send them your deduction records for whatever they ask for including your mileage logs, receipts, or your tax diary.
This means that an IRS agent can send out hundreds of letters at one time. If you are an independent contractor or own a business, you are as much as 700% more likely to be audited than the average tax payer and this percentage is probably going to go up now that agents don’t have to be present.
Nine Ways to Reduce Your Chance of an Audit!
If you are like most people you have an inborn fear of the IRS audit. But as the saying goes, “if ye are prepared ye shall not fear!” Here are nine things you can do to help reduce your chance of an audit.
- File your tax return electronically or send it in using registered mail/Fed Ex. The reason is that if the regional IRS center doesn’t get your return then they might audit you to find out why! I strongly recommend your accountant files it electronically.
- Make sure the IRS has your correct address. If you move, fill out IRS Form 8822, “Change of Address”. Several years ago, USA Today reported that the IRS had $78 million in refunds, but they couldn’t find those people.
Note: Maybe I am crazy, but if the situation was reversed and the IRS wanted money from you, don’t you think they would find you? Filing a change of address is very important not only for refunds but in case IRS needs to send you an important notice.
If you move, you may be liable to the IRS without knowing it because you didn’t provide a change of address. The IRS is only responsible for sending notices to the last known address of the taxpayer.
- Make sure your tax return is neat. I met a person who thought that if the IRS couldn’t read his return, they wouldn’t audit him. This is absolutely false! The return must be neat and easy to read or the people who input the information into the IRS computers might input the wrong information which could trigger an audit.
- Report all your income: IRS has implemented various sophisticated software programs to find people who don’t report all their income. Make sure that your tax return reports all income you earned and identifies the income by source. Don’t try to hide income from the IRS!
Taxbot Tip: If you get a wrong Form 1099 or W-2, contact the company or person who sent the wrong form and ask for an amended form. If they won’t do that (e.g. they are out of business) you still should report the full amount on a separate attached schedule and back out the amount that is incorrect, showing the reason for the error.
- Have your return prepared by a competent tax preparer. Studies show that people who do their own tax return have over twice the error rate of that of a tax professional. The IRS knows this which means that if you do your own return, you could be increasing your chances of an audit; not to mention the competent tax professional probably knows more than you and might find you more deductions.
- Break your income and large expenses into smaller segments: Break down large ticket items to explain to the examiners exactly what was involved in the expenses. For example; if you claim $25,000 of computer expenses, you would probably trigger an audit. However, if you attach an explanation showing that the $25,000 was comprised of computers for thirty new employees, then it looks reasonable.
- Keep records of expert advice received: If you relied on the advice of your accountant or lawyer, keep records as to the nature and date of the advice. There are cases in which penalties have been waived for a good-faith reliance on an independent expert.
- Don’t die. The government in both U.S. and Canada audits about 68% of all final returns. The only good thing about dying is that you do not have to show up at the audit.
- Be careful of what you tell other people: The IRS pays up to a 30% commission for people to rat on you. If you want to make a living reporting tax cheats, get IRS publication 733, “Rewards for Information Given to the Internal Revenue Service.” Thus, don’t tell people about what you are doing with your taxes. Even if you are doing everything correctly, if someone thinks you are cheating and reports it to the IRS, they might audit you! The top rats in the country are:
- Disgruntled boy or girl friends
- Disgruntled employees
- Ex partners
What to Do if Audited?
Assume that you will be audited whenever you prepare your return: The time to get ready for an audit is when you are preparing your information for your tax preparer to do your tax return. Make sure you are organized so if you are audited in 6 years you can easily find and explain everything. Letters or memorandums from your accountant, if any, should support questionable items.
Don’t avoid the audit: An audit notice doesn’t mean that you did anything wrong! It is simply a request by the government to find out if your return was prepared correctly. Generally, you will be notified by mail. So don’t skip town or do anything to get out of it. That makes you look guilty.
Try to limit the scope of the audit: The audit notice will tell you exactly what is being audited. Only bring the information that addresses these problems and nothing else. Otherwise, you might encourage a fishing expedition by the agent to look into other matters.
Understand that the burden of proof is on you! Tax law requires you to prove your deductions are valid. The IRS needs to prove nothing. You are not innocent until proven guilty here. Here is where using Taxbot shines in that proper use of it will meet that burden and reduce the time it will take for the audit.
Dress normally for the audit: Don’t make a special trip to Goodwill Industries to buy dingy clothes. Don’t wear expensive clothes or expensive jewelry either. Examiners dislike people who look like they make a lot more money than they do. But they also don’t like people trying to look like a charity case.
Be on time for the audit: Burn this point in your head! IRS and CRA examiners are graded on efficiency. If you are late for your appointment and cause the auditor to be inefficient or to take a longer time on the audit than he or she should, you start the audit off on the wrong foot.
Typically, an agent starts examining your return about a half-hour before the audit begins to see what the problems are. If you are late, you are giving them more time to evaluate your return. The best bet is to be early!
Be and act organized: Make sure that you are prepared to answer questions and deliver any required proof of deductions to the auditor. If you look or act disorganized, they will think that much of the return won’t have sufficient back up, which could result in a more in-depth audit. Also, better organization means a faster audit, which could bring this whole unpleasant task to a quick conclusion.
Don’t volunteer information: Although I recommend that your accountant show up without you, sometimes your presence is necessary. If you attend an audit, you should NEVER elaborate on an answer. Keep your answers short and to the point. Finally be very careful what you say to an auditor. This information can be used in a subsequent criminal trial.
Ask for tax law references: If you think you are right ask the auditor or agent for the legal reference. Don’t accept vague statements or interpretations of the law. Make your tax advisor the goat by saying, “My accountant told me that this deduction was proper (assuming this was the case).“ Can you give me something to show that he’s wrong?”
Don’t be alone with a special agent: Special Agents are NOT special. Their job is to investigate criminal activities. If there are ever two agents to see you, ask whether either of them is a Special Agent. If so, terminate the meeting and seek out a good criminal tax lawyer. Many times it is easier for the government to get you on the crime of lying to an agent than on the crime itself.
Hot Tip: There is no privilege protecting your communication with your accountant on criminal matters. Accordingly, never hire an accountant to represent you in criminal cases unless they are lawyers too. In addition, you should probably terminate any communication with your accountant since anything said to them can be obtained by IRS in a criminal matter.
If you need to deal and communicate with your accountant, have your lawyer hire the accountant so that any future conversation is protected under the attorney-client privilege.
Don‘t EVER tamper with the evidence or lie to an agent: It is much easier for the government to get you on lying to an agent or tampering with evidence than on the crime itself. Thus, don’t back date documents or intimidate witnesses.