Consulting with a tax attorney who is also a certified public accountant is one of the first things most taxpayers should consider when they learn of a pending audit. A professional trained in both disciplines will be in the best position to access the weaknesses in the original positions taken and protect your legal rights when faced with an audit. Regardless of when a taxpayer seeks counsel, one crucial bit of advice is the importance of solid recordkeeping and financial organization.
Taxpayers and small business owners quite often find it sufficient to quickly compile expenses and other ongoing tax-relevant information on the eve of each year’s filing. However, regular year-round maintenance of financial files and information including keeping a formal set of books makes it much easier to defend the original tax position taken upon receiving notice of an audit and then subsequently presenting your supporting records to the IRS or state taxing authorities. Additionally, mileage logs, spreadsheets and good, old-fashioned file folders for bills and receipts will be a comforting and handy resource if you ever need to assemble the numbers behind a previous tax filing.
Every audit is likely to point out at least a few mistakes or inconsistencies, but several general strategies can decrease the likelihood of additional tax, penalties and interest being assessed and reduce the stress of looming potential criminal and civil penalties commonly associated with the audit process:
- Track down any information that may be missing or inadequately documented as soon as possible. Everything from past medical bills and payroll information to 1099 forms and other crucial documentation should be included as necessary.
- If you presented a shoe box to your tax preparer, chances are you will need to have you tax representative for the audit supervise the preparation of a proper set of books that supports to the extent possible the original position taken.
- If you attempt to handle the audit yourself, respond promptly and professionally to the IRS at all stages of the process. Working closely with a tax lawyer helps you present information clearly and comprehensively to avoid misunderstandings. There is a world of difference between negligence in the preparation of your original return and willful intent to understate your tax liability. Only an attorney can fully protect your rights if your intent comes into question.
- Ask questions of your attorney to ensure that you understand the audit process and the objectives of IRS examiners. While you cannot count on an auditor being your friend, knowing what to expect so you do not react defensively can protect you from becoming their enemy. An attorney can often be instrumental in shielding you from being interviewed in the first place and will properly prepare you to be credible where an interview cannot be avoided.
Notice of an audit is guaranteed to cause anxiety and concern, and taxpayers should know that the best case scenario of an audit is a “no change” audit where the taxing authorities accept the original return as filed which is extremely rare. The service also will ordinarily look to the other two open tax years for the same issues it found in error in the tax year that is audited.
Whether you are well aware of what triggered the audit or you are at a loss, sound legal advice and experienced insights about the tax code and audit process is an indispensible asset. Moreover, most audits present an inherent conflict of interest between yourself and the original preparer of the return. The preparer has a vested interest in protecting his own reputation and livelihood, which can result in a detriment to your reputation with the taxing authorities.
Helping Taxpayers Understand Their Rights and Assess Their Obligations
A combination California tax attorney and CPA can explain everything from audit timelines to the implications of a criminal tax investigation. Understanding the potential for a deficiency finding and associated penalties and interest and the subsequent collection process is the best way to take control and thus minimize the inherent stress of an audit that has appeared on the horizon.