IRS Collections

IRS Tax Audit Penalties: What You Should Know

If you have been summoned for an audit by the IRS, you should know that the odds of escaping without owing additional taxes are slim. In general, the IRS does not spend its resources on conducting tax audits unless there is a good chance for significant revenue to be gained.

What you may not be aware of is that, if you owe more, along with extra taxes, you will likely be assessed penalties of some type. The amount and severity of the tax audit penalties that you face are directly related to the type of deficiency the audit uncovered. But you also have the opportunity to soften the blow or perhaps even have the penalties removed.

Accuracy Related Tax Penalties

If an IRS audit finds that you filed a substantially inaccurate return, you could be facing accuracy related penalties of 20 percent of the amount you underpaid. In extreme cases, the penalty charged could be doubled to a whopping 40 percent of your total tax underpayment. The following list indicates the types of accuracy related penalties that may result from a tax audit. (About Money)

  • Negligence or Disregard of Regulations. Failure to make a reasonable attempt to adhere to Federal tax code rules, such as failing to file a tax return at all
  • Disregarding IRS Rules or Regulations. Positions taken on tax returns that are substantively inconsistent with IRS regulations
  • Substantially Understating Your Taxes. Understating your income by $5,000 or 10 percent, whichever is greater.
  • Substantially Misstating the Value of Property. Overvaluing of donated property or undervaluing of depreciating property by 200 percent carries a 20 percent penalty. Overvaluing donated property or undervaluing depreciating property by 400 percent carries a 40 percent penalty
  • Substantially Overstating Pension Liabilities. Overstatement of pension liabilities by at least 200 percent carries a 20 percent penalty; overstatement of pension liabilities by 400 percent carries a 40 percent penalty. No penalty will be applied if the overstatement is $1,000 or less
  • Substantially Understating a Gift or Estate. Erroneously stating the value of property claimed on a gift tax or estate tax return at 65 percent or less of its actual market value carries a 20 percent penalty. Erroneously stating the value of property claimed on a gift tax or estate tax return at 40 percent or less of its actual market value carries a 40 percent penalty. No penalty will result if the understatement results in a tax underpayment of $5,000 or less.
  • Understatements Related to Reportable Transactions. 20 percent penalty for understating tax liabilities due to a tax shelter or tax avoidance transaction that are disclosed. Inadequately disclosed tax shelters or tax avoidance shelters that carry a 30 percent penalty.

Penalties for Failure to File Returns and Pay Taxes

If you are late in filing your tax return or paying your taxes, the penalty is 5 percent of the unpaid tax, charged each month, up to a maximum of 25 percent. A minimum penalty of $135 can be charged for returns filed more than 60 days late. Filing your return on time but paying late carries a lighter penalty of 0.5 percent of the tax you owe each month up to 25 percent. If you are charged for both penalties for the same month, the penalty for failure to file is reduced to 4.5 percent. (IRS.gov)

If you fail to pay up on taxes owed after an audit, the IRS will assess a penalty of 0.5 percent for each month the tax is not paid. The clock starts ticking 21 days after the IRS issues the notice. If you pay the amount owed in full within 21 days, you will not be charged an additional penalty.

To add insult to injury, if an audit results in accuracy related penalties, fraudulent failure to file a tax return or civil fraud, the IRS adds interest of 3 percent annually to the amount of your penalty. If the penalty is $100,000 or less, you have 21 days to pay in full before interest is added. If the penalty is more than $100,000, you only have 10 days to pay up before the IRS begins adding interest.

Civil Fraud Penalty

If an IRS audit results in a charge of civil fraud, you won’t wind up in jail. But the IRS slaps a hefty 75 percent penalty on any tax underpayment that resulted from fraudulent activity.

There is one sliver of a silver lining to this financially dark cloud — accuracy related penalties cannot be applied to taxes owed as a result of civil fraud. In other words, you can’t be penalized on top of a penalty.

Fraudulent Failure to File a Tax Return

If you mistakenly believe that you were not obliged to file a tax return and the IRS catches up with you through an audit, you’ll be hit with penalties for failure to file and failure to pay, but you won’t be charged with fraudulent failure to file a tax return.

Instead, fraudulent failure to file a tax return refers to a deliberate failure to file a return, and can be either a civil or misdemeanor criminal offense, although civil charges are much more common. If criminal charges are filed, you could be sentenced to up to a year in jail plus $25,000 in fines for each year that you fail to file. The statute of limitations for criminal charges is six years; there is no statute of limitation for civil charges.

Willful Failure to Pay Estimated Taxes or Keep Records

Willful failure to pay estimated taxes or maintain tax records is considered to be a misdemeanor by the IRS. Just as with fraudulent failure to file a tax return, civil rather than criminal penalties are applied most often for this type of infraction. If the IRS brings criminal charges against you, as the result of an audit or criminal investigation, you could face up to a year in jail and $25,000 in fines for each year for which you are charged.

Filing a Fraudulent Return

Many tax protesters, including actor Wesley Snipes and singer Lauryn Hill, have found themselves on the wrong side of the law because they filed frivolous returns based on claims that income taxes are unconstitutional. Filing a fraudulent tax return is considered a felony, but less serious than tax evasion. If you are convicted of filing a fraudulent return as a result of an audit or as a result of IRS investigation, you could face up to 3 years in prison and up to $100,000 in fines. (IRS.gov)

Tax Evasion

Tax evasion has snared some of the most notorious figures in history, including Chicago crime syndicate boss Al Capone. The IRS defines tax evasion as the willful concealment or misrepresentation of financial resources and assets to avoid paying taxes. If an IRS audit or criminal investigation results in a tax evasion conviction, you could be facing up to 5 years in prison and up to $100,000 in fines.

Audit Reconsideration

If worse comes to worse and you are nailed with more taxes and penalties as the result of an audit, but you disagree with the result, you can request an audit reconsideration. You must request it before you pay any taxes, penalties or interest that you intend to dispute, not after. If you have already paid the taxes, penalty and interest, you must request a refund. Submit the following documentation to the same office that conducted your audit. (Journal of Accountancy)

  • Statement explaining your reasons for requesting an audit reconsideration
  • Form 1099, cancelled checks, bank statements and similar new documentation
  • Copies of previously supplied materials
  • Copies of correspondence from the IRS

The IRS is not obligated to grant your request. But if you can demonstrate any of the following circumstances, your request for audit reconsideration should be approved.

  • You did not appear for the audit
  • You moved and did not receive proper notice for the audit
  • You submitted documentation that the IRS refused to consider that would reduce or eliminate the taxes, penalties or interest you owe
  • You have new documentation to support your case
  • You file a return that shows the correct tax to replace a return created by the IRS because you previously failed to file a return
  • The IRS committed math or processing errors in calculating the tax you owe

The IRS should respond to your request for an audit reconsideration within 30 days, although the wait could be longer. Bear in mind that penalties and interest continue to accumulate during that time. If you are suffering financial hardship due to delays in processing your audit return, you can ask for your request to be expedited.

Offer in Compromise and Penalty Abatement

If your request for audit reconsideration is denied, you may still be able to ease your burden. If you cannot pay the full amount of tax that you owe, you may request an Offer in Compromise, which settles your tax obligation for a fraction of what you actually owe. Be forewarned that the IRS accepts only a small percentage of Offers in Compromise. Obtaining expert advice from the experts at Optima Tax Relief will improve your odds.

Under certain circumstances you may request a penalty abatement, which results in some or all the penalties you have been charged being waived. The IRS generally approves requests for penalty abatement based on reasonable cause or administrative waivers. To request a penalty abatement, file IRS Form 843 along with copies of any documentation you may have to support your request.

Tax Tips: What to Do if Audited by the IRS

You’re being audited by the IRS. You don’t know exactly what you are in for, but you’re convinced that it can’t be good. You have heard the horror stories and you are bracing for the worst. While it’s true that an IRS notice is almost never good news, unless you have deliberately tried to scam the IRS, you should get through the ordeal OK.

Don’t Panic

First of all, don’t panic. You aren’t going to prison. You won’t end up destitute and living under a bridge. Even if you wind up owing the IRS big time, the odds are good that you will be able to work out a repayment plan. Back in the bad old days, the IRS earned its nasty reputation for ruthlessness. Abusive tactics by the IRS have been implicated in at least one case where a taxpayer was driven to suicide. These days, the IRS has significantly changed its approach to be more cooperative with taxpayers. Just in case you’re really worried: When does the IRS file criminal charges?

Determine What Type of Audit You Are Facing

Remember the letter you received from the IRS? Go back and read it again. The letter will inform you of the type of audit you are facing, which years are under investigation. It also shows the date and time the IRS expects you to provide the information it is seeking. In the best case scenario, the IRS is pursuing a correspondence audit covering one or two elements of a single year’s tax return, with a deadline by which the IRS expects to receive your reply. Correspondence audits are conducted entirely by mail and make up 75 to 80 percent of all audits. An in-person interview audit takes place at your local IRS office. A field audit is scheduled for a particular date and time, but takes place in your home or office. It is considered the most comprehensive type of audit.

Gather Your Documentation

Once you have determined what information the IRS is seeking, it’s time to begin gathering your paperwork. If the IRS is challenging a particular deduction or tax credit that you claimed, gather whatever documentation you have to support your claim, including bank statements, receipts and invoices. Provide as much information as possible concerning the inquiries the IRS has made, but do not volunteer information the IRS has not requested. Also, make photocopies of everything that you intend to provide to the IRS. Never give up your original documents.

Obtain Professional Representation If Necessary

For a correspondence audit covering only one or two simple inquires, you probably don’t need professional representation. But if you are among the 60 percent of Americans who hire professionals to prepare your tax returns, the same preparer should respond to an IRS correspondence audit. Even if you prepare your own returns, having a professional such as an attorney from Optima Tax Relief check out your response before you return it to the IRS may save you from making costly errors. If you have been contacted for an in-person interview audit or a field audit, the IRS allows you to be accompanied by a representative. If at all possible, take advantage of this opportunity. You will likely be nervous during the procedure, and may volunteer information that might prompt the IRS agent to probe beyond the original scope of inquiry. Having a professional present reduces this possibility. Additional Tax Tips:

The IRS Criminal Investigation Process How to Know if the IRS Is Auditing You How to survive an IRS tax audit

Tax Tips: When does the IRS file criminal charges?

Statistically, your chances of being charged with criminal tax fraud or evasion by the IRS are minimal. The IRS initiates criminal investigations against fewer than 2 percent of all American taxpayers. Of that number, only about 20 percent face criminal tax charges or fines.

Related Article: The IRS Criminal Investigation Process

Unofficially, the minimum amount of unpaid taxes required to trigger an IRS criminal investigation is $70,000. And since the majority of Americans don’t even earn that much money, it’s easy to see why ordinary taxpayers need never worry about facing tax evasion or fraud charges.

While honest mistakes or even negligence generally won’t trigger a tax investigation, perpetrating fraud very well might. IRS agents are trained to recognize signs of criminal tax fraud and evasion. Exhibiting behaviors the IRS calls “affirmative acts” could eventually result in that fateful knock on the door from the IRS.

Negligence versus Tax Fraud

Back in the day, it seemed like the IRS was lying in wait, prepared to strike unsuspecting taxpayers at the slightest sign of tax error. These days the IRS is more tolerant of mistakes made by honest taxpayers.

When the circumstances are not clear cut, the IRS frequently errs on the side of giving the taxpayer the benefit of the doubt. Miscalculating the amount of your Earned Income Tax Credit is a mistake that could cost you a significant sum of money, but it isn’t usually considered to be tax fraud. Artificially concealing $800,000 of income by keeping two sets of books? Tax fraud. (Nolo)

Evidence of Fraud

Four so-called elements of fraud are recognized by the IRS: deception, misrepresenting material facts, submitting false or deliberately altered documents and failing to submit critical documents, such as tax returns. Several elements of fraud must occur together to trigger IRS fraud charges. But a single element that occurs in an especially blatant fashion may generate IRS tax fraud charges.

For instance, failure to submit a tax return for a single year is not usually considered to be an element of tax fraud. On the other hand, unless your income is extremely low, failing to file any tax returns ever could very well cause the IRS to initiate a criminal investigation against you.

Badges of Fraud

The list below, taken from the IRS.gov website, represents several “badges of fraud” the IRS looks for when determining whether to file criminal charges.

Badges of fraud fall into four general categories: improper reporting of income, unjustified deductions or tax credits, inadequate record keeping and outright illegal behavior. As with elements of fraud, IRS agents are inclined to give taxpayers the benefit of the doubt. They’ll impose penalties for taxpayers in arrears rather than bringing criminal charges against them.

  • Understatement or omission of substantial sums of money
  • Fictitious deductions
  • Maintaining “shadow” sets of accounting records
  • Deliberate destruction of records
  • Evidence of consistent underreporting of income
  • Obviously nonsensical explanations for behavior
  • Refusing to cooperate with an auditor or examiner·
  • Deliberately concealing assets, as in overseas tax shelters
  • Illegal activities
  • Dealing exclusively in cash
  • Maintaining obviously inadequate records
  • Indicators of Fraud

The IRS categorizes indicators of fraud into six broad categories: income, expenses and deductions, books and records, income allocation, methods of concealment and taxpayer conduct.

Just as with elements of fraud and badges of fraud, the difference between negligence and criminal conduct is often a matter of extent. Indicators of fraud usually include an element of deliberate conduct as well. An extensive list of actions that constitute indicators of fraud are available on the IRS website, but the examples below should provide a general idea of how the IRS views indicators of fraud.

Example #1:

Forgetting to include income from a W-2 form is not considered an indicator of income fraud. Insisting on being paid cash wages for a job and refusing to list any income from that job on your federal income tax return would be considered to be an indicator of income fraud.

Example #2:

Miscalculating the percentage of business versus personal use for your computer is not considered an indicator of fraud for expenses and deductions. Attempting to deduct the entire cost of your vacation to the Bahamas because you answered a single work-related email from your hotel room WOULD be.

Don’t Be Evasive

In general, if you suspect that a particular type of conduct is disallowed by the IRS, you shouldn’t do it. If you go ahead and do it anyway, you run the risk of being cited for tax evasion or tax fraud. And if you do receive that dreaded knock on the door from the IRS, you should not be surprised.

Additional Tax Tips:

The IRS Criminal Investigation Process
What to do during an IRS Audit
How to survive an IRS tax audit

Dealing with an IRS Audit – 10 Expert Tips

You have received the dreaded notice that your tax return is being subjected to official review. In other words, you’re being audited. While an audit is never good news, neither is it necessarily a catastrophe. Keep your wits about you and follow a few strategies suggested by experts, and you will survive your audit and live to file another tax return.

1. Know What Type of Audit You Are Facing

There are three types of audits: correspondence or mail audits, office examination audits and field audits. An overwhelming percentage of all audits – approximately 75 to 80 percent – are correspondence audits. Correspondence audits are usually limited to one or two specific questions. Once the IRS receives satisfactory responses, you’re done.

Office examination audits are conducted at a local branch of the IRS. You will need to attend in person, but you are allowed to be accompanied by your accountant or attorney. Field audits are conducted on your turf and are the most comprehensive. As with office examination audits, you are allowed to have representation present during a field audit. In fact, it is highly advisable.

2. Understand What Auditors are Seeking

While each audit is different, all audits focus on three basic questions:

  1. Is your business truly a business – or just a hobby?
  2. Are your deductions legitimate?
  3. Did you report all your income?

If you can answer these three questions to the satisfaction of the auditor, you stand a good chance of emerging from an audit relatively unscathed.

3. Get Your Ducks in a Row Beforehand

Read the letter you receive carefully. If you are dealing with a correspondence audit, determine which documents you need to collect to respond to the questions posted in the audit notification letter. If you must report in person for an office audit or prepare your home or office for a field audit, ensure that your paperwork – and your representative – will be available and ready. Prepare your responses to the points that have been raised for the years that have been included in the audit notification letter.

4. Ask for More Time if Needed

In most cases, you should have sufficient time to adequately prepare for an audit. But if you must retrieve past year returns or other documents that are difficult to obtain, you may need more time.

Ask for a recess or an extension as soon as you know you will need one. If the IRS refuses, mention that you want more time to obtain professional advice – a request which the IRS must grant.

5. Be Totally Truthful in Your Responses

Seriously, lying to an IRS auditor is a bad idea. First, IRS auditors will frequently ask questions to which they already know the answers, just to determine if you are being straight with them. Get caught in that sort of a lie and you’re done. Second, IRS auditors are not likely to take your word for whatever you say. If you make a false claim, you will have to provide false documentation to back it up. Can you see how this sort of conduct could eventually lead to a criminal tax fraud or tax evasion charge? Just don’t do it.

6. Don’t Volunteer Information

Be as transparent as possible in your responses to the questions you are asked. At the same time, do not volunteer information that the IRS agent has not requested. If your audit only covers two years worth of taxes, don’t offer paperwork for the last decade’s worth of expenses. If you want to prepare documentation for the past decade just in case, that’s fine, but let the IRS agent do his or her own job.

7. Substantial Compliance Is Your Friend

Nobody is perfect. Even the IRS recognizes this. If you can prove that you have properly claimed a tax deduction or credit, odds are good that the IRS agent will allow it, even if you lack some documentation. The IRS calls this substantial compliance. This doesn’t mean that you can be sloppy about documentation. It does mean that if you just can’t find one drink receipt from a business trip but your hotel bill, airfare receipts, meeting agenda and other documentation are in order, you can probably relax.

8. If You Disagree, Appeal

If you disagree with the outcome of an IRS audit, you do have the right to appeal. Begin by contacting the auditor directly. If you can’t get satisfaction that way, go to his or her superior. If you’re still not satisfied, more formal recourse is available.

One option is to request alternative dispute resolution (ADR). You may also file a request with the Office of Appeals. You may also file legal action with the Tax Court. If you are slapped with tax penalties in addition to owed taxes, you may be able to get at least some of them waived, reduced or abated — eliminated altogether. (IRS.gov)

9. If You Agree but Can’t Pay, Negotiate

If you agree with the outcome of the audit, even grudgingly, but you just don’t have the cash to pay what you owe in full, don’t panic. Pay what you can and negotiate for terms you can deal with to cover the rest. If you owe $25,000 or less, you may request an installment agreement by filing Form 9465, Installment Agreement Request either online, by mail or in person. If you owe more than $25,000, file Form 9465-FS, Installment Agreement Request. You may also make payments by automatic payroll deduction by filing Form 2159, Payroll Deduction Agreement.

Related article: Top 10 Benefits of Working with a Professional Tax Relief Firm

10. Don’t Go it Alone

With the very simplest of correspondence audits, you may be able to gather the necessary paperwork and respond on your own. Nonetheless, it doesn’t hurt to have an accountant or a tax professional like those at Optima Tax Relief check over your response before you send it to the IRS. For in-person audits, hiring a professional to help you deal with your audit is highly advised. If you aren’t sure, find out if you need to “lawyer up” here.

Tax Tips: How to Get a Copy of Your IRS Transcript

Getting a copy of your IRS transcript is easy and can be done entirely via the IRS.gov website. Follow these simple steps to retrieve your tax transcript.

Keep in mind that only transcripts for filed taxes are available. For example, if you did not file in 2003, there won’t be a tax transcript for that year. Also if the IRS has not finished with your taxes, the transcript will not be available until they have completed those taxes.

  1. Visit the IRS website at IRS.gov.
  2. Look under the Tools tab that is part way down the web page. Click: Get transcript for your tax records.
  3. Once you reach the transcript page, you can request to get them by mail or continue getting them online by clicking on the box to the left, Get transcript online.
  4. If you have gotten transcripts before, you can sign in. If not, you will need to click on the right side to create an account: Sign up.
  5. Complete the sign up process and log in.
  6. The next page will show a drop down menu and ask why you need the transcript. Choose the answer that best fits your needs and continue. They ask you what you need it for so they can help you pick the right transcript.
  7. The next page lists all your transcripts, in four different categories for all the years you filed. These include Tax Return Transcript, Record of Account Transcript, Account Transcript, and Wage and Income Transcript.
  8. Select the transcript you need for the right year.
  9. The site will automatically generate a PDF file of your transcript. Print it and save it.
  10. Log out completely or close the browser when you are finished.

Make sure your pop-up blocker is off for the IRS site. It can cause errors when trying to retrieve your transcripts. If you chose mail, allow 5 to 10 business days for them to arrive before requesting another.

If you have problems navigating the website, you can contact the IRS for further assistance at 1-800-829-1040. For further assistance or help with a different tax issue, contact Optima Tax Relief.

Tax Tips: What Happens in an IRS Audit

The main purpose of an IRS audit is to determine whether you owe more in income taxes than you have already paid. Understanding that basic point puts you that much ahead of the game.

Correspondence Audits

Correspondence audits almost never expand into full-blown audits. Read the letter from the IRS carefully and provide photocopies of documentation to support any credits or deductions that you have claimed. Answer the questions as thoroughly as possible, but do not volunteer information that is not requested. Having a tax professional check over your documentation and response before you mail it back to the IRS is a good idea.

In-Person Audits

The IRS conducts two types of in-person audits: interview audits at a local IRS office and field audits conducted at your home or place of business. For audits conducted at an IRS office, you are expected to provide copies of tax records and deductions for the years listed in the audit notice. The agent will go over your records, asking questions about particular deductions or credits that you have claimed. Field audits are conducted much like interview audits, except that the IRS agent comes to your home or office.

In both instances, if you hired a professional to prepare your returns, he or she can and should represent you at the audit. You may also hire a professional such as an attorney from Optima Tax Relief to go with you to the audit even if you prepared your own return; in fact, it strongly recommended. Just as with a correspondence audit, you should be as transparent as possible concerning the questions asked by the IRS agent. Again, do not volunteer information the agent has not requested.

Audit Determinations

There is no set duration for an audit. There are three possible conclusions to an audit.

  • No change: you successfully defended your deductions and credits to the IRS agent and owe no additional taxes
  • Agreed: The IRS agent concludes that you owe additional taxes, and you agree with the results of the audit
  • Disagreed: The IRS agent concludes that you owe additional taxes, but you disagree with the results of the audit.

If you agree with the results of the audit, but cannot afford to pay what you owe, don’t panic. You won’t wind up leaving the audit wearing a barrel. The IRS is usually willing to work with you to create an installment agreement or some other repayment schedule that you can live with.

If you disagree with the audit, you can request another review of your results. You may also request mediation or file a formal appeal. If those attempts fail to yield a satisfactory result, you may file legal action with the Tax Court.

Additional Tax Tips:

The IRS Criminal Investigation Process
What to do during an IRS Audit
What does the IRS look for in an audit?
IRS penalty and interest rates

Tax Tips: How to Know if the IRS Is Auditing You

You may be under the impression that if you’re being audited, you’ll find out by a strong knock at your front door. Unless you’re in serious trouble, this won’t be the case.

How will you know if you’re being audited? Short Answer: The IRS will let you know directly.

The only way you will know for certain if the IRS is auditing your is if the IRS tells you – either by phone or mail. If your initial contact is by email, it’s likely a scam and you should report it.

Who is most likely to be audited? According to Bloomberg News, only 1% of all tax returns each year are audited. But there are factors that increase your chances of being targeted.

  • Being rich. 12.5% of all tax returns for those who make over a million dollars a year.
  • Mistakes on your tax return. This could be anything from not reporting all of your income, your numbers not matching with W2s your employer provided or even math errors on your return. Don’t round your numbers.
  • Self-employed. IRS will look at your deductions to see if they are the typical amount for someone in your industry. Travel/entertainment and automobile deductions are watched especially closely. While a home office is no longer an immediate reason to suspect an audit, taking the deduction  needs to be backed up with detailed records.
  • Large charitable donations. If you only make $20,000 a year and yet donated a substantial amount of money, watch out.
  • Your associates. If your business partner in a firm or a close relative is being audited, you could be too.

There are three types of IRS audits, depending on the complexity of your return, the number of questions the IRS has and the dollar amount involved.

  • Correspondence audit – An audit conducted entirely by mail. The IRS likely has a short checklist of questions to ask you about your income, expenses or itemized deductions.
  • Field audit – The IRS will send an agent to visit you in person in your home or business. They will want to inspect the records you’ve kept.
  • Office audit – You are requested to meet with an agent at their nearest office and bring your paperwork with you to the meeting.

If you are audited there are four things to remember:

  • Respond to their letters within the deadline given on the notice. If you need more time, you’re far more likely to get an extension if you ask for it before the deadline’s passed.
  • Gather all the documentation you need to answer their questions and provide copies to the IRS. (Never give them your original documents, they aren’t responsible if anything is lost.)
  • Bring the right representation. Not your Uncle Bill but a CPA or tax attorney. This is not the time for amateur help or to go it alone.
  • Be polite and respectful. But don’t volunteer anything. If the agent wants to expand the audit, you are entitled to more time to answer any new questions that may arise.

A tax audit can be a painful experience but you will get through it with thorough preparation, and if needed, expert help from Optima Tax Relief.

Additional Tax Tips:

The IRS Criminal Investigation Process
What to do during an IRS Audit
What does the IRS look for in an audit?
IRS penalty and interest rates

Tax Tips: How to survive an IRS tax audit

There is no sugarcoating the fact that receiving an IRS tax audit notice is almost never good news. But unless you have deliberately hoodwinked the IRS, you probably have less to worry about than you think. You may not walk away unscathed, but you likely won’t wind up wearing an orange jumpsuit, either.

Be Prepared to Come Clean

If the IRS audit covers tax periods where you know you’ve been less than forthcoming, now is the time to come clean. File that missing tax return, or file an amended return to account for the income you omitted earlier. When the auditor asks about that particular item, you can state with confidence that it’s been taken care of. If you’re lucky, that may be enough to convince the agent to end the audit then and there.

Brace for the Worst

Yes, you probably will wind up paying more money to the IRS as the result of an audit. The vast majority of tax audits conclude with the taxpayer owing more. Start setting aside funds so that when the final assessment is made, you’ll be able to reduce the bill by a decent amount. If you know that you cannot pay, be ready to offer an action plan for installment payments. Don’t suggest a plan that forces you to function at absolute subsistence level. It’s not necessary and the IRS agent will be skeptical that you can actually follow through with such an austere budget.

Get Backup

If your audit is being conducted at a local IRS office, in your home or at your place of business, the agent will probably conduct a thorough inquiry of your documentation of the particular tax returns in question. You don’t have to face the inquiry alone, and you shouldn’t. If you had your return prepared by a third party, he or she should be present at the audit. You also have the right hire a representative to go with you to the audit even if you prepared your own return. (IRS.gov: Taxpayer Rights)

Just the Facts

Being honest and forthcoming with an IRS agent in giving responses to his or her questions is smart. Volunteering information, not so much. Pay attention to what the agent is asking you and limit your responses accordingly. Otherwise, you may disclose issues the agent previously had no idea about, which could jack up your tax bill considerably. Likewise, if the agent asks you about a matter unrelated to the tax returns that were included on the IRS audit notice, it’s OK to let the agent know that you do not have the proper documentation available to respond to that particular inquiry.

Say No to Extended Deadlines

You usually have several months to prepare for an audit, which should be plenty of time to track down past years’ tax returns and other relevant records. But the IRS may request a waiver of the normal three year statute of limitations. You have the right to refuse.

Statutes of limitations generally limit the time the IRS has to make tax assessments to within three years after a return is due or filed, whichever is later. That particular date is also referred to as the statute expiration date. Statute of limitations will also limit the time you have to file a claim for credit or refund. (City Data)

If you are uncertain about what to do, consult with a tax attorney or certified public accountant before consenting to the waiver.

Remember, IRS Agents are People, Too

Although the IRS agent assigned to conduct your audit may come off as a complete bean counter, remember that he or she is human. Show a bit of common courtesy and conduct yourself in a cordial and professional manner. Like all human beings, IRS agents make mistakes. If you believe the agent is off the mark with his or her assessment of your tax obligation, you have the right to ask to speak with a supervisor or file an appeal. Just be prepared to support your claim with copies (not originals!) of receipts, cancelled checks, certifications or other relevant documentation.

You Will Survive

Unless you are found to have blatantly flouted IRS regulations, your tax audit will most likely not result in criminal charges. If the auditor slaps you with a huge tax bill that you agree with but cannot pay, you can usually negotiate a deal to pay off what you owe. Your financial affairs may also be better organized than before the audit, which may be the silver lining in an otherwise very dark cloud.

Additional Tax Topics:

The IRS Criminal Investigation Process
What to do during an IRS Audit
What does the IRS look for in an audit?
IRS penalty and interest rates

What Does IRS Code 9001 Mean?

You filed your federal income tax return awhile ago and you are expecting a refund. You can check the status of your return and your refund check (for paper returns) or direct deposit (for electronic returns) at the IRS.gov website. The “Where’s My Refund?” portal also provides an estimate of when you should expect your refund. 

If you receive an error code such as IRS Code 9001 when you check the status of your return, you may worry that your return has been flagged for an audit. Relax. In fact, IRS Code 9001 is one of an entire set of codes that are included within the Internal Revenue Manual, or IRM, which is the set of guidelines used by the IRS. This is not an audit flag, but rather an error code generated when taxpayers attempt to access return or refund results using the wrong Social Security number or TIN.

Where’s My Refund?

The IRS established the “Where’s My Refund?” portal to allow taxpayers to check the status of their federal income tax return and refund. To access the portal you need three pieces of information: your Social Security Number or Taxpayer Identification Number (TIN), your filing status and amount of the refund that you are expecting. This refund amount should be listed in whole dollars and must match the amount listed on your tax forms exactly.

Taxpayer Identification Number (TIN)

Most taxpayers include a Social Security number on their tax returns. But certain taxpayers, such as resident and nonresident aliens, are not eligible to get one. The Taxpayer Identification Number (TIN) is designed to allow individuals to file federal and state income tax returns, without an SSN.

IRS Code 9001

In most instances, when you check the status of your return on the “Where’s My Refund?” portal, you will receive a message stating that your return is being processed or that your refund is on its way. Occasionally, you may receive one or more error codes, including IRS Code 9001: “Taxpayer accessed Refund Status using a secondary TIN. Refund Status could not be returned. Get a Primary TIN Analyze account and follow appropriate IRM.” The fix is simple – enter the proper Social Security number or TIN into the “Where’s My Refund?” portal. If you still receive error messages, contact the IRS or an expert such as an attorney with Optima Tax Relieve for further assistance.

Tax Tips: What to do during an IRS Audit

You’re being audited by the IRS. You don’t know exactly what you are in for, but you’re convinced that it can’t be good. You have heard the horror stories and are bracing for the worst. While it’s true that an IRS audit notice is almost never good news, unless you have deliberately tried to scam the IRS, it doesn’t have to be scary.

Related article: Top 10 Ways to Avoid a Tax Audit

First, Don’t Panic

First of all, don’t panic. You aren’t going to prison. You won’t end up destitute and living in a van down by the river. Even if you wind up owing the IRS big time, the odds are good that you will be able to work out a repayment plan. These days, the IRS has significantly changed its approach to be more cooperative with taxpayers.

Determine What Type of Audit You Are Facing

Remember the letter you received from the IRS? Go back and read it again. The letter will inform you of the type of audit you are facing, which years are under investigation, and the date and time the IRS expects you to provide the information it is seeking.

Best case scenario, the IRS is pursuing a correspondence audit covering one or two elements of a single year’s tax return, with a deadline by which the IRS expects to receive your reply. Correspondence audits are conducted entirely by mail and make up 75 to 80 percent of all audits. An in-person interview audit takes place at your local IRS office and is scheduled for a particular date and time. A field audit is also scheduled for a particular date and time, but takes place in your home or office. It is considered the most comprehensive type of audit.

Gather Your Documentation

Once you have determined what information the IRS is seeking, it’s time to begin gathering your paperwork. If the IRS is challenging a particular deduction or tax credit that you claimed, gather whatever documentation you have to support your claim. This should include any related bank statements, receipts and invoices. Provide as much information as possible about the inquiries the IRS has made.

Do Not:

  • Volunteer information the IRS has not specifically requested.
  • Send your original documents.
  • Fail to make photocopies of all documents and correspondences.

Do You Need Professional Representation?

For a correspondence audit covering only one or two simple inquires, you probably don’t need a tax pro. But if you are among the 60 percent of Americans who hire pro to prepare your tax returns, the same preparer should respond to an IRS correspondence audit. Even if you prepare your own returns, having a professional from Optima Tax Relief check out your response before you return it to the IRS may save you from making a costly error.

If you have been contacted for an in-person interview audit or a field audit, the IRS allows you to be accompanied by a representative. Take advantage of this opportunity. You’ll likely be nervous during the procedure, and may share information that might prompt the IRS agent to probe beyond the original scope of inquiry. Not only that, most IRS agents prefer dealing with a professional.

Additional Tax Topics:

The IRS Criminal Investigation Process
IRS penalty and interest rates