IRS Audit Attorney Serving Jersey City and All of New Jersey
No one ever wants to receive the dreaded IRS audit letter in the mail. Even if you do your best to do things by the book, the audit process can be time-consuming, frustrating, and result in an adjustment to your tax return.
The keys to an IRS audit are (1) limiting the number of items they examine, (2) limiting the number of years under audit, and (3) presenting the information to the IRS in a neat, organized fashion. IRS auditors (“revenue agents”) have a never-ending stack of audits to complete. If you try going to an audit meeting with a shoebox full of receipts, it’s unlikely the revenue agent will take the time to see if the receipts match the tax return.
Generally, the IRS will open one tax year for audit. If there are many adjustments to that year, they will open other years. It’s incredibly important to be well prepared for the audit. You want to enter the meeting with organized ledgers and backup documentation to support the deductions on the return.
Here’s what you should know about IRS audits:
IRS Audit Types
There are three IRS audit types:
2. Office Audits
3. Field Audits
The order listed generally matches the seriousness of the matter: correspondence audits are used for simple issues, whereas field examinations are more complex.
IRS Audit Type 1: Correspondence Audits
While correspondence audits are usually routine, they can spiral into more serious audits. Many correspondence audits occur because of a discrepancy between what was reported on a tax return and what the IRS information returns show. Here’s an example:
You have a salaried position at a company. For the 2016 tax year, you receive a W-2 showing $50,000 in income. The W-2 is an information return. The IRS gets a copy of whatever you receive. If you report $40,000 in wages on your tax return, but the W-2 shows $50,000, a correspondence audit is likely.
Do You Need an IRS Audit Attorney for a Correspondence Audit?
Whether you need an IRS audit lawyer for a correspondence audit will depend on (1) the complexity of the issue and (2) the money at stake. If it’s a relatively simple issue, like a discrepancy between an information return and a tax return, it’s probably something a taxpayer could handle on his own.
However, if the issue the IRS is currently looking at is simple, but you know there are bigger issues with the return—such as underreported income or false deductions—you should hire an IRS audit attorney for help.
Even if it’s a simple issue, but there’s substantial money at stake, it may be worth investing in an audit law firm for assistance to make sure the audit is resolved smoothly. At our initial consultation, I will also try to give an accurate cost-benefit analysis of whether it’s worth hiring a tax attorney for the issue you’re facing.
IRS Audit Type 2: Office Audits
The second type of IRS audit is an office audit. This is where the taxpayer or the taxpayer’s representative meets with the IRS revenue agent (the auditor) at an IRS office. Generally, these audits revolve around substantiating deductions.
Do You Need an IRS Audit Lawyer for an Office Audit?
If you do not have the proper substantiation for your deductions (receipts, proof of payment), or if you “fluffed” your expenses, hire an IRS audit attorney to handle the matter. If you have accurate and ample books and records, it still may be a good idea to hire representation. I’ve had many taxpayers who thought their books and records were accurate but were not fully aware of the IRS requirements, resulting in large proposed adjustments.
IRS Audit Type 3: Field Audits
Field audits are usually the most serious type of audit and involve the most complicated issues. The IRS’s most experienced auditors handle field audits. Field audits are generally done at the business’s location or at the representative’s business.
Do You Need an IRS Audit Attorney for a Field Audit?
If you’re under a field audit, it’s a very good idea to hire representation such as an IRS audit attorney. These audits are more complicated than most. The stakes are usually higher too in terms of potential liability.
The IRS Audit Process
Many steps are involved in the IRS audit process. The steps give taxpayers opportunities at different levels to defend the positions on the return.
IRS Audit Letter or Phone Call
If you’re being audited by the IRS, you will receive a letter in the mail. You may also receive a telephone call from the auditor handling your matter. The audit letter will let you know the tax year under IRS examination. Generally, the IRS will start with a single tax year. It may later expand in scope to multiple tax years.
Why am I Being Audited?
There are several reasons you could be under audit. Some audits are random. Others result from the “ex-factor”—the ex-spouse, ex-employee, or ex-partner who turned you into the IRS. Others are part of specialty programs the IRS runs. Some specialty programs include:
- Abusive Transaction Promoters
- Offshore Compliance Initiative
- High Income/High Wealth Taxpayers
- Special Enforcement Program (SEP)
The audit could also start because of a related examination. Perhaps your tax preparer or business is being audited. Or perhaps you engaged in a type of transaction that’s come under IRS scrutiny.
But the most likely reason you received an IRS audit letter is because of your DIF score. DIF is Discriminant Index Function. It’s a computer modeling system the IRS uses to essentially see how likely your tax return has errors. For instance, let’s say you make $40,000 a year. You take unreimbursed business expenses of $50,000 a year. Your DIF score—and therefore your audit potential—will be high because it’s unlikely a taxpayer is spending more in unreimbursed business expenses than they are making.
The exact DIF score formula is secret to prevent taxpayers from gaming the system.
The initial audit letter will usually tell you to call the IRS office to schedule an appointment. It may also include an Information Document Request (“IDR”). An IDR is simply a request for documents. You’re not legally required to produce the documents in an IDR, but if you don’t, the IRS may issue a summons for the records. The IRS can also request documents from third parties, such as banks.
The Audit Meeting
The next step in the IRS audit process is the audit meeting. If you’re under correspondence audit, there won’t be a meeting and the document exchange will occur via snail mail or fax.
The IRS audit meeting will take place either at an IRS office, the taxpayer representative’s office, or the taxpayer’s business. Depending on the complexity of the audit and the number of documents to be reviewed, the meeting can last a few hours, days, or weeks. More IDRs may be issued, and the IRS may request documents from third parties. If it appears adjustments to the return are warranted, the IRS may open other tax years for examination.
How Many Years Can the IRS Audit?
Generally, the IRS can only audit returns filed within the last 3 years. But if you omit 25% or more of your income on your tax return, the IRS can go back 6 years. If the tax return is fraudulent, the IRS has an unlimited amount of time to audit the return. Even if the tax return is not fraudulent, but you do not include certain forms, the IRS can audit the return forever. These forms mostly involve international forms, such as Form 3520 or Form 3520-A.
The Conclusion of the IRS Audit
At the end of an audit, the auditor will send a Notice of Proposed Adjustment and the Revenue Agent’s Report.
All audit cases end in one of three ways:
- No change – The IRS reviewed your return and found no adjustments.
- Agreed – The IRS reviewed your return, made adjustments, and you agree with the adjustments made.
- Unagreed – The IRS reviewed your return, made adjustments, and you disagree with the adjustments made.
Every taxpayer would love to close the audit with a no change. I’d love to close all my audits with a no change.
If you sign the case agreed, the case will be forwarded to collections if you cannot pay the balance in full. Only sign if you agree with all the changes. If you do not sign, you’ll receive a 30-day letter, which notifies you of your appeal rights. If you do not respond to the 30-day letter (or there’s not enough time on the statute of limitations to have a 30-day letter issued), you will receive a 90-day letter, also known as a Notice of Deficiency. The Notice of Deficiency is your way to tax court.
In many cases I handle, I file tax court petitions in response to the Notice of Deficiency. This doesn’t mean I go to tax court on all my cases, however. After filing the tax court petition, the case will be assigned to an Appeals Officer. This is a great opportunity to resolve the matter. Appeals officers have more flexibility than auditors and will settle cases based on hazards of litigation. Hazards of litigation recognize that the IRS may not have a slam dunk case and could lose on an issue if they take the case to tax court. The more hazards raised, the better deal you can get with appeals.
Even if you don’t settle your case at Appeals, there’s an opportunity to meet with IRS counsel to obtain a settlement.
What’s the Benefit of Having Paladini Law Represent You in an IRS Audit?
Education and Experience: I have a Master of Laws in Taxation from a top 10 tax law program. I worked at one of the largest and best tax controversy firms and handled some of the most complicated and risky audits. I have a perfect client score on AVVO. I’ve also dealt with enough IRS auditors to know what approach works and when.
Results Driven: At the end of the day, you’re the one left paying the IRS bill. But what many tax professionals don’t consider is it’s not just about the IRS bill. If I can save you $3,000 in taxes but arguing a unique position, but it will cost you $4,000 in attorney fees, is it worth it? This is the cost-benefit analysis I present to the client day one and continually update them on.
Client Focused: I return all phone calls, texts, and emails within 24 hours—even on weekends. I know being under IRS audit is stressful, and I know how important it is for you to know what’s happening. I send frequent updates on the case, and I frequently move things around my schedule to accommodate phone conferences and meetings with clients. It’s not only my goal to provide extraordinary results, but also to make sure you feel confident and relaxed in the approach we take.
It’s simple: It’s better to have someone who’s been there and done that than try to go it alone. I’ve lost track of the number of taxpayers who’ve tried to handle IRS audits on their own and come to me after receiving a heart stopping notice of proposed adjustment. They think their books and records are clean. But they are not aware of the IRS statutes and regulations governing different transactions. And while there’s still an opportunity to change the auditor’s mind or take the case to appeals, it’s much more difficult once you’ve said and presented information in a certain light.
If you hire me, I take over the case completely. Let an experienced tax audit lawyer handle all communication with the IRS. I also review every document you provide to make sure it accurately reflects the transaction. I also make sure to meet with the auditor at my office or at the IRS so it does not disrupt your business.
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