Tax audit representation, also called audit defense, is a service in which a tax or legal professional stands in on behalf of a taxpayer (an individual or legal entity) during an IRS or state income tax audit.
During an income tax audit or examination, the IRS and all states allow a taxpayer to have an authorized representative. The representative must have permission to practice before the IRS or state, and specific credentials are required. The types of representatives who are allowed to represent taxpayers before the IRS in income tax audits include attorneys, CPAs, and enrolled agents.
An audit representative develops the strategy used to defend the taxpayer’s position. He or she assists the taxpayer in preparing all documents requested by the taxing authority and typically attends all meetings and handles correspondence on behalf of the taxpayer.
Unfortunately, some unlucky people wind up getting audited.
Seventy percent of audits are just a letter asking for more information about your tax returns, and you’re asked to mail back forms proving your income or deductions. In other cases you’ll get an invitation to meet with an agent to discuss your tax forms, a scenario that sends many taxpayers into a panic.
Well there’s no need to panic, but there are certain steps you should take.
Ignoring the IRS is the worst possible thing you can do. The situation won’t go away.
While you should write back as soon as possible, you or your audit representative can ask for more time to gather the paperwork and forms. A two week extension is not an unreasonable request of your IRS agent.
Most of the time the letter you get in the mail is just a simple request for information – the IRS just wants you to mail in your 1099 form, for instance, or they want to see receipts for the business meals you deducted. In that case, just sending in the requested paperwork is usually sufficient, and you don’t need to get your lawyer or accountant involved.
If you can’t find the information they’re looking for, you’ll probably want to call a professional to advise you on your next move. And if you’ve been called in to meet with an agent, you should almost certainly bring in outside help from a qualified tax attorney or accountant.
You’ll need to grant power of attorney to your audit representative, to let them handle everything while you stay home.
You might think that bringing in a professional firm that deals with audit representation will annoy the agent or make him or her think you’re guilty – it will do quite the opposite, actually. Your IRS agent will generally prefer to deal with an attorney because they will prepare the requested information in a way that’s easy for the agent to read, and will do so in a dispassionate and professional way.
Only about 2% of audits are random; the rest of the time, the IRS has very specific questions it wants answered, and will request forms and receipts accordingly.
That means two things: Send or bring all the forms you’re asked to bring, and answer all the questions to the best of your ability.
That second point is important. Whereas keeping your mouth shut is usually best when you’re getting interviewed by the police, in an audit you’re usually best served by stating your case and answering all of the agent’s questions. After all, if the IRS is calling you in to talk about how much income you reported, it’s probably because the agency believes you’re underreporting. The audit is your opportunity to convince the IRS otherwise.
With that said, it’s possible to overshare. This is not the opportunity to brag about how much money you made last year.
Once the audit is done, the agent will assess any taxes and penalties you owe. However, the assessment can always be appealed. The IRS may be willing to cut you a deal that will make you happy because they don’t want the case to drag on. This is another time where it pays to have good audit representation form an attorney experienced with tax negotiations. A good tax attorney will be skilled at escalating the case to make a settlement easier.
The IRS’ lawyers are ready to negotiate and will often settle cases before going to court.
If the IRS Criminal Investigation Division starts investigating your case due to suspicions of tax fraud, you need to hire a criminal tax defense professional to represent you. The stakes are simply too high to risk facing a criminal investigation by yourself and no form of tax resolution should take precedence over hiring the right form of representation.
Whether a case constitutes tax fraud depends just as much on your intentions as on your actions. A specialist in criminal tax defense can guide you through the investigation and tax resolution process, giving you the best possible chance to avoid criminal charges.
When you do have tax problems and are seeking a tax resolution, your odds of success will be heavily influenced by how well you communicate with the IRS and its employees or agents.
There are a number of things you can do to help things go smoothly when dealing with IRS representatives:
Of course, considering the stakes involved, this is much easier said than done. No matter what you do you will always be at a disadvantage when dealing with the IRS. Most taxpayers have little or no experience in handling tax problems, tax resolution, and the IRS collection process. However, the IRS agents you will be facing are the absolute experts when it comes to dealing with taxpayers like yourself. It is their job. It is what they do every single day of their working lives. And, while most people know very little about the myriad of details and nuances of the tax code the IRS knows every rule and every tool they can use against you. The IRS literally knows every trick in the book because it is their book, they wrote it.
The IRS can sometimes saddle you with a tax debt that is actually the responsibility of your spouse or ex-spouse. If the actions of your spouse caused the tax problem and you were unaware of or had no part in those actions, you can use the IRS Form 8857 to request tax resolution called “innocent spouse relief” and have the tax debt and penalties removed.
IRS Tax Discharge
In some limited cases, delinquent taxes can be discharged through a bankruptcy. There are two basic types of bankruptcy available: Chapter 7 and Chapter 13. There are very specific and complex rules in regards to discharging delinquent tax debt through a bankruptcy. At minimum, the following criteria must be met:
The IRS has a Statutory limit of 10 years to collect on a tax debt. The statutory period initiates the date the tax is assessed and the statutory required notice letter is sent. If this collection statute date expires, there is a possibility of your tax debt being eliminated. However, Statute of Limitations of IRS debt can be extended in many instances.
If you currently own or have owned a business with employees, and owe 941 or Employee Withholding Tax then you NEED TO RESOLVE YOUR TAX ISSUE IMMEDIATELY! The IRS is most aggressive when it comes to these types of taxes. If Payroll Taxes are not paid, you are putting your income, assets, and business reputation at risk.
If these taxes (Payroll Tax 940/941) are neglected long enough, the business may be forced to close and all assets can be seized to satisfy the debt. Regardless if the business is closed, you must make arrangements to pay the taxes. The IRS will not be deterred and by not paying or making arrangements your personal finances are at risk. One of our tax consultants who specialize in Payroll Tax Issues can discuss what options are available and what will be the best course of action.
In many cases, State Tax Collection authorities can be more aggressive and act before the IRS takes action. Typically, those who owe the IRS, also end up owing state tax. State tax collection authorities have tremendous reach and can cause financial hardship if not dealt with in a timely manner.
Can you afford to live on 50% of your paycheck? Probably not. When the IRS or a State has failed to collect back taxes, they will begin to seize assets. If phone calls and letters are not returned, they will take the next step. This process is called a “levy”. The taxing authorities are legally allowed to seize bank accounts, demand payment from accounts receivable, take control of property for auction, and assume title on vehicles. Virtually anything of value can be seized to satisfy the outstanding debt.
Wage garnishments are another form of tax levy, though the seizure of assets from your paycheck is an ongoing process. If the levy on your wages is removed through, the wage garnishments will be stopped.
Since wage garnishments function as a basic form of a forced, involuntary installment plan, they can sometimes be removed through tax resolution by setting up a regular and approved installment plan. Besides removing the burden from your employer and giving you the power to handle the payments yourself, an installment plan can often be set up with payments that are considerably less than the wage garnishment amounts. That is why this form of tax resolution is very common.
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