under audit

You're Being Audited. Now, What do You do?

Dec 27th 2017
Share this content

With less than week left in 2017, it’s time to take stock of tax busy season and prepare for the possibilities. And that possibility is the audit. So, here’s a Q&A to break down what you can do (or if you’re the tax preparer, how to help your client) in the event of an IRS audit.

Question: My wife and I have been notified by the IRS that it has selected our returns for audit. This will be our first audit, and we’re apprehensive. What should we expect?

Answer: Usually, IRS audits are uneventful. Auditors ask taxpayers to produce receipts, canceled checks, and similar documentation to verify deductions and other facts and figures. When taxpayers come up with the required substantiation, examiners move on to other audits.

In fact, the feds frequently close cases without exacting extra taxes. And in many others they even authorize refunds.

Surprise Audits

Be concerned when an IRS investigator walks in unannounced at your home or office and asks to see your records. Odds are that a surprise audit means the agency suspects you filed a return that’s fraudulent.

So should you be targeted for what looks like an out-of-the-ordinary audit, make sure to find out the official designation of the person with whom you’re suddenly chatting. Is the Sherlock a revenue agent with the Examination Division or a special agent with the Criminal Investigation Division?

The difference isn’t academic. Revenue agents conduct routine examinations of dependency exemptions, business expenses, and similar items; ordinarily, special agents are assigned exclusively to investigate suspected criminal violations of the tax laws.

Also be on guard when you receive advance notice of an audit and two examiners show up to scrutinize returns. Both may be revenue agents — one a veteran and the other a rookie who's along merely to get some on-the-job experience.

However, the appearance of two examiners often means that a special agent and a revenue agent are teamed together on a "joint investigation” —  the bureaucratic euphemism for what goes on when the agency accumulates evidence for a criminal prosecution.

The IRS sets strict guidelines for its special agents on what they can and should do when they drop in—with or without notice. They’re supposed to identify themselves as special agents and to advise individuals of their constitutional rights. The ones that most concern you are "the right to remain silent and to be advised by an attorney."

Taking Action

So, what do you do when you become aware that you’ve been singled out for a criminal investigation?

Your options immediately dwindle to one: Get the advice of an attorney knowledgeable about criminal investigations before you hand over any records or make any statements to special agents. Such disclosures can come back to haunt you when they’re pieced together and repeated on the witness stand by government sleuths.

IRS investigators can compel third parties to furnish information about their business dealings with you. In fact, the IRS can obtain information for a year later than the one in issue.

Unsurprisingly, the courts have told aggrieved taxpayers that they aren’t entitled to damages for harassment and humiliation by IRS agents just because the investigators try to collect overdue taxes.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting). 

Best Wishes to My Readers for a Happy New Year. As someone who keeps his creditors at bay only because he has a certain talent for demystification of the Internal Revenue Code, I would be remiss in the discharge of my obligations to you were I to fail to note that “year” includes, but is not limited to all calendar, fiscal and taxable years. Consistent with the Joycean murkiness of Code Section 441, “taxable year” includes regular and short taxable years as well as taxable years having 366 days.