How to Negotiate with the IRS: Tax Audits

In Part II of our three-part series on “How to Negotiate with the IRS,” I talk about some tips for success when it comes to tax audits or “exams.”

What is an audit?

An audit is an examination of a tax return done either in person ( a “field” audit), or by mail (a “corr” audit). There are far more corr audits than field audits.

What are some of the things that may trigger an audit?

The IRS never gives its exact formula away, but we do know that high deductions and unusually low gross income tend to be audit red flags. Also, there are “whistleblower” audits (generally when ex-spouses and ex-employees call you out to the IRS). Additionally, the IRS has ramped up its scrutiny of tax returns with international income.

What are things I should not do in an audit negotiation?

  1. Don’t be rude. Always be polite. It makes the process for you smoother, and to be honest, auditors are more willing to help you out. But be mindful! Remember the auditor is not your friend. They know that the friendlier they are, the more you are willing to share. You could trip up and say something that seems innocent to you that can get you in trouble.
  2. Don’t Lie. If an auditor catches you in a lie, your outcome will likely be painful. Also, it is rare, but these are the types of people who get referred to Criminal Investigations Divisions.
  3. Don’t just give them boxes of all your records.  If you give them all your records, you are telling the auditor you were never all that organized. The auditor will then have to go through a lot of work to organize your boxes of information. Usually, their assumptions about your financial story will not be helpful to you.
  4. Don’t play “hide the ball.” If the IRS wants something, they can usually get the information from somewhere, or someone else, even if you refuse.
  5. Don’t take it personally. This is the hardest. Although it is incredibly personal to you, it really isn’t. Getting representation for this reason alone is worth it. Even tax professionals get representation if they get audited.
  6. Don’t give up hope. An auditor’s determination of an issue is not final. The best plan of action is to create a record that can be won on appeal, or in tax court if the audit doesn’t go your way. Your appeal or tax court petition will go much better if you have been polite, honest, organized, upfront, and have treated your audit as a technical matter, not as a highly personal issue.

Should I tape record my audit?

The law allows you to record your audit. However, we advise against it as it creates a hostile relationship. It also forces the auditor to go by the book, which sometimes can be highly disadvantageous.

Is there a criminal risk of prosecution?

Yes, but it is very little if you are polite, honest, organized, upfront, and properly represented.

Can I hire Parent & Parent LLP to represent me in an audit?

Yes. We have successfully assisted thousands of US taxpayers around the globe. Feel free to contact us and ask if we can help you and your case. We will let you know if we feel that you need our representation, or if you have alternatives. Read our success stories here.