If you or your business is contacted by a representative of the Internal Revenue Service concerning a tax problem, you are best advised not to engage in any direct conversation or correspondence. Instead, politely avoid any substantive discussion and call your accountant or tax attorney; if you do not have one at the time, you are urged to engage one.
Many taxpayers feel that by being friendly and responsive to an IRS agent, the agent will either go away or treat the taxpayer better than otherwise. Not so. Statistics strongly support the conclusion that the best results in an audit are obtained by a disinterested third party.
Third party representation offers a number of advantages. First, your representative acts as an intermediary between you and the IRS. This gives you an opportunity to reflect upon the IRS’ inquiries, locate documents in response to its requests, and respond in a more intelligent and organized manner. Secondly, a third party representative removes all emotion from the audit contact. Lastly, your representative has experience in dealing with the IRS, knows its policies and procedures, and is best suited to reach a settlement if for some reason your tax return is not accepted as filed.
Criminal Investigation. If you are contacted by a special agent, a representative of the Criminal Investigation Division of the IRS, or an FBI agent, our recommendation is even stronger. Be courteous; give your name, address, and social security number, and leave it at that. These government representatives are generally involved in the investigation of income and other tax crimes, not routine audits. Information disclosed to these agents may be used against a taxpayer in a criminal proceeding.
We have witnessed criminal tax cases which have been damaged severely by direct client contact prior to our engagement. In almost every case where there has been prior contact between a client and a special agent, the likelihood of a successful conclusion of the case has been rendered more difficult.
Scope of Inquiry. The first task upon being contacted by the IRS is to determine the scope of the inquiry. Is it an audit of a particular item on a personal return, such as the deductibility of points or interest expense? If it is an audit of a corporation that has elected Subchapter S status, is the issue a corporate issue or will it also affect the shareholders? Often an S Corporation audit will be expanded to include an audit of the returns of each shareholder. Is the audit related to pension, profit sharing, or IRA matters? Maybe it is an employment tax audit. Once the scope of the audit has been determined, an analysis of the case can be performed and an appropriate response prepared.
Many “routine” audits result from the failure of a taxpayer to include income that is reported to the IRS by a third party payor. Examples might be interest earned on a bank account or a dividend which the taxpayer overlooked. Other audits result from unusual types or amounts of expenses or deductions. Once the focus of the inquiry is established, the taxpayer’s representative should attempt to reach a settlement with the IRS and seek to prevent the scope of the inquiry from being broadened.
Intrusive Audits. It was noted in the May 1996 issue of Money Magazine that IRS agents increasingly have been asking intrusive financial status questions in audits. The inquiries concern anything from what kind of car you drive to where your children go to school. The American Institute of Certified Public Accountants has suggested their members resist this process, in essence, to “clam up”.
Included in this expanded data gathering by the IRS are questionnaires concerning personal living expenses and other inquiries concerning the lifestyle of the taxpayer. These types of questions are often encountered when there is a suspicion of hidden income; they are not normally encountered in a routine audit.
Remember – when the IRS contacts you, be polite, but keep it short. Then call your tax advisor. Nothing you can say will improve your odds of prevailing over the IRS.
Many taxpayers feel that by being friendly and responsive to an IRS agent, the agent will either go away or treat the taxpayer better than otherwise. Not so. Statistics strongly support the conclusion that the best results in an audit are obtained by a disinterested third party.
Third party representation offers a number of advantages. First, your representative acts as an intermediary between you and the IRS. This gives you an opportunity to reflect upon the IRS’ inquiries, locate documents in response to its requests, and respond in a more intelligent and organized manner. Secondly, a third party representative removes all emotion from the audit contact. Lastly, your representative has experience in dealing with the IRS, knows its policies and procedures, and is best suited to reach a settlement if for some reason your tax return is not accepted as filed.
Criminal Investigation. If you are contacted by a special agent, a representative of the Criminal Investigation Division of the IRS, or an FBI agent, our recommendation is even stronger. Be courteous; give your name, address, and social security number, and leave it at that. These government representatives are generally involved in the investigation of income and other tax crimes, not routine audits. Information disclosed to these agents may be used against a taxpayer in a criminal proceeding.
We have witnessed criminal tax cases which have been damaged severely by direct client contact prior to our engagement. In almost every case where there has been prior contact between a client and a special agent, the likelihood of a successful conclusion of the case has been rendered more difficult.
Scope of Inquiry. The first task upon being contacted by the IRS is to determine the scope of the inquiry. Is it an audit of a particular item on a personal return, such as the deductibility of points or interest expense? If it is an audit of a corporation that has elected Subchapter S status, is the issue a corporate issue or will it also affect the shareholders? Often an S Corporation audit will be expanded to include an audit of the returns of each shareholder. Is the audit related to pension, profit sharing, or IRA matters? Maybe it is an employment tax audit. Once the scope of the audit has been determined, an analysis of the case can be performed and an appropriate response prepared.
Many “routine” audits result from the failure of a taxpayer to include income that is reported to the IRS by a third party payor. Examples might be interest earned on a bank account or a dividend which the taxpayer overlooked. Other audits result from unusual types or amounts of expenses or deductions. Once the focus of the inquiry is established, the taxpayer’s representative should attempt to reach a settlement with the IRS and seek to prevent the scope of the inquiry from being broadened.
Intrusive Audits. It was noted in the May 1996 issue of Money Magazine that IRS agents increasingly have been asking intrusive financial status questions in audits. The inquiries concern anything from what kind of car you drive to where your children go to school. The American Institute of Certified Public Accountants has suggested their members resist this process, in essence, to “clam up”.
Included in this expanded data gathering by the IRS are questionnaires concerning personal living expenses and other inquiries concerning the lifestyle of the taxpayer. These types of questions are often encountered when there is a suspicion of hidden income; they are not normally encountered in a routine audit.
Remember – when the IRS contacts you, be polite, but keep it short. Then call your tax advisor. Nothing you can say will improve your odds of prevailing over the IRS.
– Mike Beausang