Surviving an IRS Audit

by: Graham Blackburn

Throughout history, people have harbored a certain degree of anger and fear for tax collectors.  The modern day IRS is not too different.  It’s a massive organization tasked with implementing a tax system that is simultaneously complicated and impactful.  The dreaded IRS audit is the primary source of fear, but with a better understanding we can help alleviate some of that angst.

First off, it’s important to know that audit rates are declining.  In 2015, the IRS only audited 0.8% of individual taxes, or about 1.2 million returns, with higher income taxpayers more likely to be selected.  This marks an eleven year low.  Small businesses, S-Corporations and Partnerships are seeing similarly low audit rates.  Being selected for an audit does not mean you’ve done anything wrong.  Often selections are simply at random.

If you do happen to get audited, it’s helpful to understand the basics of what that means and what transpires when the IRS comes knocking.  Essentially, during an audit, the IRS has one of their agents review part or all of your tax return, in person or via mail.  They request information to support the reported figures, checking to ensure the validity.  Audits, or the potential for them, are the reason we’re told to retain reams of tax documents years after returns are filed.  As a general rule, the IRS can audit any return within the last three years.  However, if there is substantial error found on the return (>25% misrepresentation of income) the time-frame extends to six years.  In the event of an audit, our goal at Hobe & Lucas is to assist you in dealing with the IRS agent, aiming for a determination that there should be “no-change” to the tax return.

After dealing with the IRS in past instances, I have a few thoughts and recommendations:

1. Remember that it’s going to test your patience. Generally, the larger an organization, the slower it will operate, and the IRS is one mighty large organization.  Resolution is not imminent.  Lengthy periods of silence from the IRS doesn’t necessarily mean there are problems.  It just tends to take them a long time to process information and correspond.
2. Understand your appointed agent. It might be easy to think of IRS agents as a tax-collecting robots, but I think it’s important to realize that they are people with varied knowledge, motivations and personalities.  IRS agents have objectives and are actually trying to complete a difficult objective.
3. Respond in a timely manner. Ignoring letters and requests won’t make them go away.  It’s best to correspond as soon as possible to stay in the good graces of the agent, even though it seems hypocritical given the IRS’s slow response time.
4. Try to stay confident and positive. To understate the obvious, tax law is onerous.  Different individuals have varied interpretation of the law.  In an audit situation, the agent might challenge certain aspects of the return.  Defend your position if you believe it’s correct.

Overall, tax audits are fairly infrequent occurrences, but the fact is that some audits are unavoidable.  It’s unfortunate to be selected for audit, but the whole process is – manageable – and therefore nothing to fear. Hobe & Lucas tax personnel are experienced and knowledgeable in complicated tax issues and compliance with them, and we’re here to help. Give us a call 216.524.8900 or contact us.