Facing an IRS audit might seem overwhelming, but knowing the basics will help. Let's uncover
the essentials together; navigating the ins and outs of IRS audits and discovering effective ways
to take charge of your financial situation.
It is important to note that not all audits are the same. In this section, you will learn about the
different kinds and what they do.
1. Types of Audits:
● Correspondence Audit: Typically, the least complex, conducted via mail to request
clarification or additional documentation for specific items on your tax return.
● Office Audit: Requires an in-person meeting at an IRS office. It usually focuses on more
complex issues like deductions, credits, or income reported on the return.
● Field Audit: Conducted at your place of business or residence by an IRS agent. These
audits are more extensive and might cover various aspects of your financial records.
Selection for Audit:
Audits can be random, triggered by specific discrepancies or red flags in your tax return, or
selected based on connections to others under audit (like business partners or investors).
Audit Notification and Preparation:
Once selected for an audit, the IRS notifies you via mail and specifies the items or areas of the
return under review. Preparing for an audit involves gathering extensive documentation related
to the specified items on your tax return. For income, this might include W-2 forms from
employers, 1099s for miscellaneous income, bank statements, and investment income reports.
To substantiate deductions and expenses, keep receipts, invoices, bills, canceled checks, or
credit card statements related to business expenses, medical costs, charitable donations, or
educational expenses. For any claimed credits, ensure you have the necessary documentation,
such as receipts or certificates, verifying eligibility for those credits.
Audit Process:
IRS auditors examine your financial records, including income statements, expense receipts,
investment records, and other supporting documentation mentioned above. The auditor may request additional information or clarification
The Outcome of an Audit:
After the examination, the IRS may conclude that the tax return is accurate, resulting in no
changes.
If discrepancies or errors are found, the IRS issues a report detailing adjustments and any
additional taxes, penalties, or interest owed.
Appeals and Resolution:
Taxpayers have the right to appeal audit findings they disagree with. This involves presenting
your case to an independent IRS appeals officer. During this stage, providing additional
evidence and constructing a compelling argument supporting your position is crucial.
Importance of Documentation and Record-Keeping:
● Maintaining Accurate Records: Thorough and accurate record-keeping is vital to
substantiate income, expenses, deductions, and credits claimed on your tax return.
● Organized Documentation: Organizing financial records helps in providing requested
information promptly and reduces confusion during an audit.
● Keeping Your Documents: Retain relevant documents for the period specified by the IRS,
usually three to seven years.
How to Navigate an IRS Audit Effectively:
Seek Professional Assistance: Consulting a qualified tax professional or attorney experienced
in IRS audits is invaluable. They can guide you through the process, represent you during the
audit, and help navigate the complexities of tax laws and regulations.
Cooperate and Respond Promptly: Maintaining open communication and responding
promptly to IRS requests can facilitate a smoother audit process.
Now that you know more about what an IRS audit contains, let’s dive into your resolution
options to get back financial control of your business.
Effective Tax Resolution Strategies During an Audit
1. Clear Review and Explanation:
Review your tax return thoroughly before the audit. Understand the discrepancies or potential red flags that might have triggered the audit. Be prepared to provide clear, detailed explanations supported by relevant documentation to address any concerns raised by the IRS.
2. Negotiation and Settlement Options:
An Offer in Compromise is an arrangement between a taxpayer and the IRS that allows the taxpayer to settle their tax debt for less than the full amount owed. However, not everyone qualifies for an OIC. It's typically considered when:
The taxpayer demonstrates an inability to pay the full tax liability due to financial hardship.
There's doubt about the accuracy of the tax debt.
Paying the full amount would cause significant economic hardship for the taxpayer.
To apply for an OIC, the taxpayer needs to submit detailed financial information to the IRS. This includes income, expenses, assets, and liabilities. The IRS evaluates this information to determine the taxpayer's ability to pay. If accepted, the taxpayer agrees to pay a lump sum or a series of installment payments to settle the debt.
An Installment Agreement is a payment plan that allows taxpayers to pay off their tax debt in monthly installments. This arrangement enables individuals or businesses to manage their tax liabilities more feasibly over an extended period.
Streamlined Installment Agreement: For tax debts less than $50,000, a streamlined installment agreement can be set up without providing extensive financial information to the IRS.
Non-Streamlined Installment Agreement: For debts over $50,000 or when the taxpayer needs more extended payment terms, a non-streamlined installment agreement requires detailed financial disclosure.
During an audit, proposing an installment agreement demonstrates willingness to pay and can prevent harsh collection actions by the IRS.
Partial Payment Installment Agreements (PPIA):
Similar to regular installment agreements, a PPIA allows taxpayers to pay their tax debt in installments. However, with a PPIA, the monthly payments are smaller because they do not fully cover the tax liability. The remaining unpaid balance might be forgiven after the expiration of the collection statute.
PPIAs are usually granted when the IRS believes the taxpayer cannot pay the full amount during the remaining collection statute period.
Currently Not Collectible (CNC) Status:
The CNC status is a temporary measure where the IRS determines that a taxpayer doesn't have the financial means to make any payments toward their tax debt. This status effectively pauses IRS collection efforts for a specified period.
Qualification for CNC Status:
Financial Hardship: To qualify for CNC status, a taxpayer must demonstrate significant financial hardship. This could result from unemployment, severe illness, disability, or other circumstances that create an inability to pay.
Limited Income and Assets: The IRS evaluates the taxpayer's income, assets, necessary living expenses, and ability to make payments. If the IRS determines that paying the tax debt would create financial hardship, they may grant CNC status.
Effects of CNC Status:
Temporary Relief: While in CNC status, the IRS temporarily suspends collection activities, such as levies and garnishments, against the taxpayer.
Expiration and Reassessment: CNC status is not a permanent resolution. The IRS periodically reviews the taxpayer's financial situation to reassess their ability to pay. If the financial situation improves, the CNC status may be revoked.
Accrual of Interest and Penalties: Although collection activities are on hold, interest and penalties continue to accrue on the outstanding tax debt during the CNC period.
Applying for CNC Status:
To request Currently Not Collectible status, taxpayers must provide detailed financial information to the IRS. This includes income, expenses, assets, and liabilities. The IRS evaluates this information to determine if the taxpayer qualifies for CNC status.
What to Consider Tax Resolution Strategies:
Offer in Compromise (OIC):
Qualification Criteria: Meeting the stringent eligibility criteria for an OIC is crucial. The IRS considers income, assets, expenses, and future earning potential before approving an offer.
Application Complexity: Preparing a successful OIC application requires comprehensive financial documentation and meticulous attention to detail.
Potential Acceptance or Rejection: The IRS may accept, reject, or make a counteroffer based on the information provided. A rejection might prolong the resolution process.
Partial Payment Installment Agreement (PPIA):
Reduced Payment: PPIA allows taxpayers to make smaller monthly payments, but the total amount might not cover the entire tax debt.
Statute of Limitations: Similar to other agreements, the statute of limitations for collecting the debt continues to run during a PPIA. The unpaid balance might be forgiven after the statute expires.
Financial Disclosure: Detailed financial disclosure is necessary to negotiate and set up a PPIA, showing income, assets, expenses, and ability to pay.
Installment Agreement (IA):
Streamlined vs. Non-Streamlined: Streamlined IAs for debts under $50,000 offer a simpler application process. Non-streamlined IAs require detailed financial disclosure for higher debt amounts.
Payment Duration: IAs can vary in duration, allowing taxpayers to pay off their tax debt over a manageable period.
Interest and Penalties: Interest and penalties continue to accrue on the remaining balance during the IA period.
Currently Not Collectible (CNC) Status:
Temporary Relief: CNC status temporarily suspends IRS collection activities for taxpayers experiencing financial hardship.
Interest and Penalties: While in CNC status, interest and penalties continue to accrue, potentially significantly increasing the total amount owed.
Periodic Review: The IRS periodically reviews the taxpayer's financial situation, and if improved, may revoke the CNC status and resume collection efforts.
Seeking Professional Guidance:
Expert Advice: Seeking guidance from a tax resolution professional or attorney is critical. They can navigate the complexities of each option, evaluate eligibility, recommend the most suitable resolution strategy and deal with the headaches associated with IRS audits.
Long-Term Implications: Understanding the long-term implications of each option, including impact on credit, future financial status, and tax liabilities, is essential.
Appeals and Dispute Resolution:
If you disagree with the audit findings, you can appeal the decision. The appeals process involves presenting your case to an independent IRS appeals officer. Providing additional evidence and a well-constructed argument supporting your position is crucial during this stage.
Compliance, Cooperation, and Professional Assistance:
Maintaining compliance with IRS requests and cooperating fully throughout the audit is vital. Responding promptly, providing accurate information, and being transparent can positively influence the outcome.
Seeking professional assistance from tax resolution experts or attorneys experienced in dealing with IRS audits significantly enhances your chances of achieving a favorable resolution. These experts possess in-depth knowledge of tax laws, negotiation skills, and experience in simply navigating the complexities of IRS procedures.
Working with our team:
If you are dealing with IRS penalties, our team is here for you. We have dealt with a plethora of cases that have faced an audit. The experts on our team have helped countless individuals and businesses frictionlessly navigate IRS audits
and get back on track. Contact us for a free consultation today!