An IRS audit is certainly on the list of most stressful activities a person might endure. The good news is that you dont need to endure it at all, not in person, anyway. Its as easy as signing an IRS Form 2848, which gives your tax pro (who must be a licensed CPA, attorney, or enrolled agent) the ability to represent you. Once this document is in place, the IRS is prohibited from contacting you directly; if an agent does reach out to you, simply tell them to call your tax pro. This form is not only used for audit representation, but for other tax problems you may encounter where you would prefer to have an outside source deal with the situation.
For audit purposes, hiring a rep while you stay home would be worthwhile for many reasons:
1. Taking a step back from the experience will reduce your stress levels. Not having to deal directly with an IRS agent will remove a lot of the heat as you will likely be on pins and needles anyway. When you hire a tax pro, cut down on the guess work by getting his opinion as to the possible results. This may put your mind at ease or at least give you an idea of what to expect.
2. If you have a complicated income tax return, it would be better to have a tax pro handle the audit. If you are self-employed, have a home office, or rental properties, for example, there will likely be advanced topics up for argument. A tax pro that is familiar with the code will be able to navigate those waters more easily and successfully. There will likely be several arguments regarding issues tinted in various shades of gray.
3. The tax pro will know if the auditor is right or wrong. Mistakes are made because tax code is complex and because there are many auditors with little experience and knowledge. In almost every audit in which Ive been involved, the auditor has taken a stance that Ive been able to reverse either by citing tax code, by explaining the taxpayers intent, or by providing more documentation. An inexperienced taxpayer may instead defer to the auditors wisdom.
4. An experienced tax pro will prepare a counter attack. She will review the tax return(s) in question to find overlooked deductions and errors in your favor that can be used to negotiate other unfavorable results.
5. The tax pro will confine the audit to the issues listed in the audit notice. Oftentimes a nervous taxpayer will speak too much. Next thing you know the audit trails off into dangerous waters. The IRS loves nothing better than a fishing expedition; they are trained to find and open cans of worms.
When choosing a tax pro, make sure he or she has plenty of audit experience and is gung ho about representing you. There are plenty of tax pros that hate dealing with the IRS as much as the average taxpayer, steer clear of them.
Is your tax pro aggressive? I once had an IRS agent tell me that many tax pros roll over during an audit. They dont argue the points and often lose valid deductions for their clients. Because there are so many shades of gray, questionable deductions become allowable once a taxpayers stance is fully explained to the auditor.
You may decide to represent yourself; perhaps you have enough knowledge and confidence to do so and the items listed in the audit letter are supported with excellent documentation. If so, go for it. At the beginning of the appointment, the auditor will interview you about general items related to your finances and your business, if you are self-employed. Keep your answers short, succinct and honest.
If you decide to represent yourself, know that you can stop the audit at any time. If you feel you are in over your head, tell the auditor you must consult with your tax pro and reschedule.
If you make it through the audit, dont sign anything until you review the results with your tax pro unless you are lucky enough to have a no change result. Then sign it and run all the way to your car.
Want to know what goes on in a typical audit? Be a fly on the wall? Stay tuned. I will cover that next week.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know, available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.