Most tax audits begin with an automated notice in the mail from the IRS. Before that audit letter makes you break out in a cold sweat, make sure you know the five things you absolutely should not do when you’re being audited by the IRS.
1. Don’t panic.
Despite news headlines about celebrities being arrested for tax evasion, there is usually no need to worry about getting hauled away in handcuffs the next time you open your door.
When the IRS reaches the point of criminal prosecution for tax evasion, it's only at the end of a long, protracted process. Arrests don't happen just because someone made a simple error on their tax return. Most cases involve a pattern of tax fraud going back several years. Arrests tend to happen after an investigation uncovers hidden income, concealed bank accounts, and false statements made to the IRS.
If you have made a good-faith effort to report all your income and deductions accurately, file on time, and pay your taxes, then you have much less to worry about. An experienced CPA can guide you through every step of the audit process.
2. Don’t ignore documentation requests from the IRS.
An IRS audit won't go away on its own, so ignoring it will only make the situation worse. Right away, it is important to gather up all the information and documents requested by the IRS for when you meet with potential CPAs to represent you.
This may be an extensive list. If you don't have all the financial documentation the IRS demands, you may need to have it reconstructed. In a process known as forensic accounting, a specialist can re-create your financial records from any known bills, receipts, and statements. Keep in mind, this is a specialized service which only some tax professionals provide.
3. Don’t miss any deadlines.
Because much of the audit process is automated, the IRS is very efficient at moving cases through to collection proceedings. If you fail to respond on time, the IRS is almost certain to enter a default decision that is not in your best interest. In this instance, they can lien your assets or even just pull the money from your bank account.
Despite the urgency of meeting deadlines, it is important to understand the process is lengthy and time-consuming. Despite the fact your CPA may try to settle right away, you may not hear a response from the IRS for months at a time.
Maintaining open communication with the IRS throughout the process is critical. If you need more time to get the proper documentation together, your CPA may be able to get an extension for you. This is definitely one of those situations where sooner the better can help as it will show the IRS you are being proactive to resolve the issue.
4. Don’t try to handle an IRS audit on your own.
One of the biggest mistakes you can make during an audit is calling the IRS yourself, which can prove to be a trying experience. Typically, every time you pick up the phone, you'll speak to a different IRS agent, who will have to go back through your account notes and start all over from the beginning.
But if you have a CPA on your side, the process moves much more quickly. As a tax professional, your CPA can call a special tax practitioner hotline and get answers faster than you can. That alone will save you, the taxpayer, a considerable amount of time and frustration.
Not only can a CPA handle the entire process more efficiently, they can also give you an edge in resolving the case. Financial statements prepared by a CPA typically carry more weight with the IRS than a statement you’ve prepared yourself.
One of the best investments you can make during this process is to find an experienced CPA who has a working relationship with the IRS, knows your rights, and can protect them.
5. Don’t hire the first CPA you talk to.
Hopefully, you already have a CPA who offers tax audit protection while they prepare your tax return, as that will cover some or all of the cost of IRS representation. But if you need a new CPA, choose carefully.
An IRS audit is the wrong time to take a chance on the very first CPA you find. It’s better to slow down, look around, ask for referrals, and build a list of several CPA candidates.
Then take a few minutes to interview each one. Ask them questions to gauge their level of expertise:
How many cases like mine has your firm settled with the IRS in the past?
Can you give me an example of a specific case where someone owed a large amount, at least $100,000 or more, and the case was settled for pennies on the dollar?
How many forensic accounting professionals do you have on your staff?
Is your firm on the phone with the IRS every single day?
Am I going to be charged per hour or a flat fee?
Ideally, your research will lead you to a CPA who specializes in IRS issues, deals with the IRS on a daily basis, and has a proven track record in settling cases similar to yours. That's the firm you want to represent you, and the one most likely to get your case settled as quickly and favorably as possible.
Please reach out to our CPAs and advisors if you would like additional information on how McNair CPA & Associates in Las Vegas, NV can help you grow your business.
Our CPAs have made (and lost) money through many entrepreneurial ventures over the years so leverage our experience for your benefit!!
702-646-0888 or www.McNairCPAs.com