Posted in general

IRS will examine (audit) hundreds of thousands of individual tax returns this year. Although that represents but a small percentage of all returns filed, this is little consolation if your return is among those selected. However, with proper preparation and planning, you should fare well.

The purpose of the examination is to verify items reported on a tax return. Typically one of two things has taken place to cause the IRS to send you a letter. First is that a third party has reported something to the IRS that appears to not have been included on your return. This might be a missing interest or dividend statement or a missing statement from a stock sale. Second is from a random selection of your return where an examiner determines an adjustment to your return is likely. The easiest way to survive a tax examination is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation-invoices, bills, cancelled checks, receipts or other proof for all items reported on your tax return. Keep all your records in one place and hold on to your calculations.

The government normally has three years to conduct an examination, and often the examination won't begin until a year or more after you file your return. So don't trust your memory. Leave a good trail. If you have to go back to your records later you should be able to backtrack all of the entries on your return.

Much like a police officer, the purpose of the IRS is to impose and collect taxes (enforcement), not to make the laws. Tax laws are created by congress and interpreted by the courts. Just because the IRS takes a position does not mean it is the correct position. Similarly, the IRS cannot always match the source documents they receive with the information reported on the tax return. This is one reason the letters they send out may be incorrect. You should not simply "take their word for it" and pay anything they request. You want to discuss the letter with a tax professional before you decide how to proceed. Even if you prepared your own return, it is often advisable to have a tax professional represent you at an examination. Your representative knows what issues the IRS agent is likely to focus on and can prepare accordingly. More importantly, a tax professional knows that in many instances IRS agents will take a position (for example, to disallow deduction of a certain type of expense) even though courts and other authority have expressed a contrary opinion on the issue. A properly prepared representative can direct the agent to appropriate tax authority and often convince the agent to reconsider their position.

Last Updated by Admin on 2012-06-29 10:35:54 AM