last update 12-10-02
IRS Audits and Your Bill of Rights
Do you know of anything more scary than to receive a letter from the IRS
that your tax return has been scheduled for an audit? Most people fear an
audit even when they know the return has no errors in it. It is the basic
fear of having someone look at their records.
In reality, audits are failry routine procedures when the return was properly
prepared and supporting records clearly document the items claimed.
Some tax returns are audited because the data in them simply doesn't look
right. Others are audited because a certain industry is being examined and the
taxpayer is a part of that industry. Still others are selected for audit on
a random basis unrelated to anything on the return. If you are audited, you
probably will not be told why your return is being audited so don't worry about
The best time to begin preparation for an IRS audit is at the time the return
is prepared. All of the supporting records should be gatherd, organized and
kept for future purposes. So many people go to an audit with little or no
records hoping to "convince" the auditor that the return is correct. That
approach will not cut it.
Types of Audits
First, examiners are constantly reviewing returns at the IRS regional center
in Memphis. When questions arise, the auditor simply writes a letter to the
taxpayer requesting supporting records. Obviously, this is the lowest level
of intensity in an audit.
The next level is referred to as an OFFICE AUDIT. In this case, the taxpayer
is asked to take his supporting records to an IRS office where the auditor will
review them. This type of audit is more intense that the previous one but
normally does not address major issues. If your records are in order, the audit
should be over in a short time. You will be allowed additional time to find
records that are requested at that meeting.
The third type of audit is the FIELD AUDIT. In this audit, the auditor
goes to the taxpayer's place of business normally because the quantity of
records are too great to take them to the office audit. This audit is also
designed as a means to examine businesses rather than individuals although
sometimes an individual will encounter a field audit. The auditor assigned to
this type of audit is normally better trained and more experienced that the
There is also the type that most people really do not want to encounter--
the SPECIAL INVESTIGATION. You know when this type of audit begins because the
agent is required to show his badge and identify himself as a Special Agent.
A special agent is a crimianl investigator whereas the normal auditor is only
trying to verify that the correct amount of taxes were paid. The special agent
is definately looking for criminal activity rather than simply checking on
the normal aspects of a tax return.
If you encounter a special agent, the best advice is to cordially tell the agent
that you have the right to legal representation and that you prefer not to
talk to the agent until you do have such representation. Although a CPA can
represent you in most IRS matters, you should be represented by an attorney
when you are dealing with a special agent.
--enough of the criminal aspects of an audit, let's move on.
Attitude--You should first remember that the IRS auditor has a right
to review any of your records that are necessary to be sure that you have
complied with all the tax laws in completing your return and reflecting your
income and deductible expenses. Therefore, you should not be angry that you
are being audited but try to be cordial.
Preparation--The easiest and shortest audit that you will ever
encounter is the one in which you are best prepared. Prior to visiting with
the auditor, you or your accountant should thoroughly review your records,
summarize them, tie them in to the figures on the return, have proper support
and, generally, do the auditors work before you meet the person. That way,
the auditor will not have reason to take any longer than is necessary or to
raise issues that were not listed in the initial notification letter.
Representation--You can completely handle an audit by yourself or
an accountant or attorney can fully represent you or you can go to the audit
with your representative. I have found it is best to have a representative
but for the taxpayer not to talk unless instructed to do so by the
representative. In this way, a person with training and experience in
the audit process can help control the progress of the audit. Many times
the taxpayer will talk too much and lead the auditor into areas that should
not have been opened.
Follow Up--If the auditor asks for additional data, you should
obtain that data and provide it as soon after the audit as possible. In this
way, the auditor can complete the audit while it is fresh on his mind without
having to review all of the aspects of the case again. An audit that is
wrapped up early is one that will not lead into the wrong areas.
Statute of Limitations
The Statute of Limitations refers to the maximum time that the IRS has to
select a return for audit. The general rule is that the return can be
audited within 3 years from the original due date of the return
or 3 years from the date it was actually filed, whichever is later.
If income has been omitted from the return that is more than 25% of the income
reported on the original return, then the statute of limitations is extended
to 6 years.
If fraud was involved in the return, then there is no statute of limitations and
the IRS can look at the return regardless of how long ago it was.
DECLARATION OF TAXPAYER'S RIGHTS
Congress has given the taxpayer a Bill of Rights to assist him in his
dealings with the IRS. Some of these rights are very basic and may not
provide real assistance to the taxpayer. They are as follows:
Protection of your rights.
You have the right to information and help from the IRS in preparing your
Privacy and Confidentiallity
You have the right to expect that the IRS will keep your personal and
financial information confidential. You have the right to know why the
IRS is asking for information, how they will use it and what happens if
you do not provide the requested information.
Professional and Courteous Service
You have the right to courteous and considerate treatment by IRS personnel.
If you believe that an IRS employee has not treated you in a professional
manner, you should tell that employee's supervisor, you should write to the
District Director or the IRS Center where you file your return.
You have the right to appear yourself before the IRS or have someone
else represnet you in your place. Your representative must be a person that
is approved to appear before the IRS, namely an enrolled agent, an attorney
or a CPA. If you are in an interview and you ask to consult with such a
person, the IRS must stop the interview and allow you time to talk to the
person or to re-schedule the interview.
Payment of Only the Correct Amount of Tax
You are responsible for paying only the correct amount of tax due under
the law--and no more, no less. If you cannot pay all of your tax when it
is due, you may be able to make monthly installment payments.
Help with Unresolved Tax Problems
The Taxpayer Advocate Service can help you if you have tried unsuccessfully
to resolve a problem with the IRS. Your local Taxpayer Advocate can offer you
special help if you have a significant hardship as a result of a tax problem.
Appeals and Judicial Review
If you don't agree with the examiner's findings or certain collection,
you have the right to appeal the decision.
Relief From Certain Penalties and Interest
You have the right to request certain penalties (but not interest) be
abated if you can show reasonable cause for the failure that led to the
penalty. The IRS will waive penalties when allowed gby law if you can show
you acted reasonably and in good faith or relied on the incorrect advice
of an IRS employee. The IRS will only waive interest that is the result
of certain errors or delays caused by the IRS.
======================== WARNING =======================
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed. Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a
attorney to discuss the specific facts of your case
and the law of your state.
If you live in Louisiana and want to talk about your situation, please
call me at:
Marvin E. Owen
3036 Brakley Drive
Baton Rouge, La 70816
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