10 Strategies When Handling an IRS Audit
Alan L. Olsen, CPA, MBA (tax)
Greenstein Rogoff Olsen & Co. LLP
The IRS is using new technology to process tax returns and conduct tax audits.
As more people are submitting returns through Electronic Filing, the IRS efficiency
in processing returns is improving. They also have more data in their system to
identify tax returns with non-compliance issues. The IRS will use new found technology
for audit selection which will support the efforts to close the nation’s tax gap.
The tax gap is the difference between what the taxpayers should have paid and what
they actually paid on a timely basis. The most recently released numbers on the
tax gap are in 2001 when the estimate was around a $290 billion short fall to the
The current workload plans will combine results over a three-year period and will
allow the IRS to update compliance estimates and develop more efficient workload
plans on an annual basis.
It is important to be properly prepared if you are chosen to be audited. If the
IRS finds that there is no change to your tax liability in the audit, then you will
not have to worry about being audited on the same issue for two years.
Steps to take if selected for audit
1. Set the ground rules
Make sure to inform your client of the procedures that come along with an IRS audit.
2. Establish the location where the IRS auditor will work.
When there is no business location for an individual return the audit will take
place at the IRS office. If the audit is for a business the IRS agent will most
likely want to conduct it at the business, however the tax preparer’s office is
the best location for the audit to take place. You will be able to best control
information provided to the auditor when it is coming from your office.
3. Determine who will speak for the taxpayer.
IRS agents may turn any casual conversation against the taxpayer, so it is important
that the taxpayer and auditor are not in direct communication with each other. In
this way you are in charge of the information that is communicated between your
client and the agent.
4. Ensure that all document requests will be in writing.
Make sure that the IRS agent understands that any document requests should
be made in writing so that you will have enough time to gather the needed information
to support deduction claims.
5. Questions and discussion of adjustments should not be negotiated until the final
When you defer questions until the last meeting it puts you in a better position
to negotiate as you will have a better understanding of the IRS audit and the information
that is needed. It will also eliminate the possibility of an auditor conceding certain
issues if they are pressed for time.
6. Agree to an Extension
If you have not gathered all of the information that is necessary for the audit,
but think that you have access to it, agree to an extension. There are two types
of extensions that you can request:
- Form 872- IRS limits the extension to issues only addressed on the form
- Form 872-a The IRS can keep all issues open
7. Refuse to Agree to an Extension
You do not have to agree to an extension if all of the issues have not been properly
addressed by the IRS and you want to close the case. This will force the IRS auditor
to issue a report. You can then either file a petition in the tax court or pay the
tax and then file a petition with the court of claims.
8. Request Technical Advice
You can always request technical advice from the IRS national office if you feel
that the IRS appeals officer will not compromise and that their position contradicts
the national office. If the national office agrees with the inconsistency in opinions,
than the appeals officer will have to follow the national office. If the national
office does not agree with your claim, then you will have to continue onto the court
Make a settlement agreement that fairly resolves the case, as some areas in tax
laws are subjective. In some multi-issue cases you may want to present a bottom
line offer that may change depending on issues that arise later.
10. Consider filing an amended return or making a cash bond.
The best way to avoid IRS audits, is to simply work with your client to make sure
that the tax return has no reason to be audited by the IRS. It is not often that
IRS audits take place. In 2006, 1,293, 681 audits were conducted for individual
returns, but the numbers are continuing to rise. Remember that preparation is one
of the best defenses that you will have against any IRS audit.