Receiving a letter from the IRS notifying that one or more tax years are being audited is unsettling to say the least. I find that most clients fall into two categories with IRS audits. Those that properly filed their returns with support for their deductions and those that knowingly took deductions that they knew were questionable or they lack support for deductions on the tax return.
Let’s look at the first group. No problem here. If one contacts the IRS as soon as possible after receiving the notice, the IRS is very agreeable to work around your schedule. Calling right before the appointment to reschedule is considered a red flag by auditors.
Keep your appointment and being prepared will be appreciated by the IRS auditor. Being prepared means having the support for your deductions in a format that is easy to verify. For example if you are being audited for office rent, have all of the invoices and checks attached to one another with a machine tape of the total. If this is done for each item under audit, your audit will be over in minutes and the auditor will have less time to ask probing questions into other areas not under review. If the auditor sees that you are organized and that deductions on the return are supported properly, the review process will be minimized and the chances of the audit expanding into other years will be avoided.
If one is in the second group, where you either took inappropriate deductions or do not have the documents to support you deduction can be a problem. These situations require the use of a professional to advise or represent you. Let me share one example to illustrate. A former client in the trucking business was being audited for his truck expenses. He lost all of his records when the contents of his storage unit were confiscated for not paying his storage fees. The auditor denied all of his fuel expenses amounting to an audit assessment of over $250,000 for the three years being audited. Much of that being interest and penalties. The auditor denied the expenses because there were no fuel receipts.
Fortunately, the client came to us for help at this point. We requested a meeting with the IRS Appeals office. We secured mileage logs from the companies that paid his for deliveries. Our client was paid so much per mile. We established support for the average miles per gallon his truck used and the average cost of fuel though out the year. We then calculated the total cost of the fuel by backing into the number with these “other support” documents. The figure was very close to the amount taken on the return. Our client was given the deduction and the assessment eliminated.
Each case should be reviewed on its own facts and circumstances. I do not charge for this initial review and recommendation. In most cases it is obvious whether professional assistance should be considered.
Scott Allen E. A.
Tax Debt Advisors, Inc.