Relearning Old Lessons: Let’s Talk About Surviving an IRS Audit

Relearning Old Lessons: Let’s Talk About  Surviving an IRS Audit

If you ask an average American which government agency they most wish had never been created, odds were that they would angrily say it is IRS – the acronym for the Internal Revenue Service. During the 1930s, the IRS inspired awe and admiration in Americans, especially after it put the infamous gangster Al Capone – the Chicago underworld’s master of brutality and bribes – behind bars(Woodward, 2013). This act of the IRS at the time scared other gangsters  and other criminals, causing many of them to came out of the woodwork to pay taxes on their ill-gotten gains. Everyone then loved the revenue agents and the federal coffers swelled as the delinquent tax payers at the time stepped forward to make good on their debt. 

But that was the 1930s, not the 2000s. People’s attitudes toward IRS has changed a great deal. Of course the essential mission of the IRS has not changed: The agency still collect the money that goes back out to build roads, operate the vast levers of government, help look after people in their old age, and fight menaces from Nazism to terrorism.  In addition, the agency locks up a few thousand drug kingpins and other tax delinquents every year. Yet most Americans don’t love IRS anymore. They see the agency as an unfriendly government department that issues nonsensical directives, makes them do hard math, and takes their money and gives it to the politicians to waste. 

That said, it is not surprising that most Americans are scared of this agency.

If you are in the high-income tax brackets, or if you are self-employed, you have the highest chance of being audited by the IRS. So the natural questions you may be asking yourself may be this: What would happen if I was audited? What can I expect? And what should I do?

What to Expect from IRS Audit

If you are like most self-employed people, or if you are a high income tax-payer, your first reaction when you receive IRS audit letter would probably be a feeling of fear, which will later be followed by shock. You  may even find yourself rereading the letter a couple of times since it is usually a whole lot of texts. Well, while some fear is understandable, it is best not to allow it to consume you. Thus while such letters can create tensions within your mind,  the first thing you must do is not to allow it to overwhelm or shut you down. 

IRS Audit Process

IRS conduct three types of audits, namely, correspondence, office exam and field exam. The IRS conducts 80 percent of individual audits through correspondence audit approach – the type of audit done via the mail. Office exam, on the other hand, refers to the type of audit that requires face time at the IRS  office. Note that office exam can last for as much as four hours(Williams, 2014). 

The third form of IRS audit, field exam, is the one that strikes fear in the hearts of the tax payers  for one key reason: it is a comprehensive, thorough audit that involves hours of intensive review and verification by the IRS agent. It is usually held at the taxpayers place of business. 

During an IRS audit, your first line of defense should be to be honest and to respond as thoroughly as you can. And, of course, you don’t want the revenue agent to expand the scope of the audit; so  it’s not necessary to volunteer additional information outside the scope of the audit as this would only lead to new potential questions from the agent(Williams, 2014).  Also, there’s no need for you to throw every bit of information and data you have at the agent since you could end up slowing down the process. 

The Worst That Could Happen After IRS Audit

Naturally, every self-employed individual will want to know if they will go to jail if they can’t show the IRS the records it requested. Generally speaking,  unless   yours is an extreme case of willful negligence and tax evasion, you may not end up in jail. 

Yet, an IRS  audit experience can be expensive. If you were selected for an IRS audit, the worst you can expect is for the agency to adjust your returns to remove all those deductions you previously claimed but cannot substantiate with documentary evidence, or to include the incomes you may have omitted. After this exercise, the IRS will add the interest from the time the tax should have been paid, and then  order you to pay the total tax due(that is, amount owed plus the interest charge). Note that the IRS agents will work with you in this manner if, and only if, they are convinced you have been co-operative and honest. Otherwise, if they deems that your mistakes on the return to be intentional and egregious, or if they feels that those mistakes represents a substantial understatement of your tax liability, they can choose to assert a 20 percent accuracy-related penalty under section 6662 Internal Revenue Code (Internal Revenue Service, 2012). If this kind of scenario applies to you, the IRS  audit will obviously be an expensive one particularly if you decide to hire an attorney or a tax accountant to help you organize your  paper work or make your  case.

But for you, assuming the above relates  to your case, your choice should be clear: if the IRS comes up with a figure that you owe, the smart thing to do is to pay up. Otherwise, the IRS can garnish your wages as well as put liens against your assets and other avenues that would facilitate their collection of the total amount you owe plus interest. 

Record Keeping is the Key!

If you are hopelessly disorganized, you will definitely have problems during an IRS audit. This explains why tax experts strongly advise all self-employed individuals to keep good records in case of an audit. Some of the types of records and paper work you will need to keep include: credit card receipts and other proves of payments, sales slips, invoices, cancelled checks,  bank statements, and your old tax returns. You will also need to keep your mileage logs or a GPS record of mileage incurred if you’ve deducted a lot of miles.

Spending all these times on your taxes alone is a lot of stress, isn’t it? It is, however, worth it to be as prepared as possible for your audit since you can end up reducing your tax liability when you do so. 

References

Internal Revenue Service(2012): Internal Revenue Manual. Retrieved May 14, 2014 from http://www.irs.gov/irm/part20/irm_20-001-005.html

Williams G.(2014): How to Survive an IRS Audit. Retrieved May 13, 2012 from http://finance.yahoo.com/news/survive-irs-audit-154000037.html

Woodward(2013): Nobody Likes the IRS Anymore. MSN News. Retrieved May 13, 2014 from http://news.msn.com/us/nobody-likes-the-irs-anymore