Representing Taxpayers in an IRS Audit Examination

The audit examination process is one of the procedural safeguards the IRS uses to ensure taxpayers are complying with our voluntary tax system. Being selected for an Internal Revenue Service (IRS) audit examination does not, however, necessarily mean that the taxpayer did not comply, filed his or her return incorrectly, or abused the system. In some cases, an audit examination may even end in a refund to the taxpayer. A practitioner can often help a taxpayer provide the information the IRS needs to substantiate the taxpayer’s position on the tax return.

The IRS conducts audit examinations in two different ways: a “letter” audit or a “field” audit. In a letter audit, the IRS informs a taxpayer, by letter, that the IRS has identified errors in a taxpayer’s return. The letter may ask for more information or propose adjustments to the tax return. As most letter audits are a result of simple mathematical errors or errors matching Form W-2 or Form 1099 information with the information reported on the return, a taxpayer may not need the assistance of a practitioner when handling a letter audit. Even in a letter audit, the taxpayer must make sure he or she communicates in a timely manner to all IRS requests for information.

In a field audit, the IRS assigns a local representative, called a Revenue Agent (Agent), to conduct a thorough examination of a tax return. Taxpayers may choose to hire a practitioner to help with an audit examination if they are feeling pressured or the audit involves complex factual or legal issues. To represent a taxpayer before the IRS, the practitioner must first complete and submit Form 2848, Power of Attorney and Declaration of Representative to the IRS.

When resolving a case in an field audit, the practitioner must be aware that the Agent is the initial finder of facts. This is the Agent’s greatest power. A good presentation of the facts can eliminate an issue at the earliest stages. The Agent will likely ask to conduct an in-person interview with the taxpayer to collect information. In most circumstances, this interview is helpful as it gives the practitioner the chance to stress the important facts and eliminate any misunderstandings. The practitioner should accompany the taxpayer to this interview and supply the Agent with all of the factual and legal information to persuade the Agent to make a favorable determination. The Agent may ask the taxpayer to provide additional information. If this happens, the practitioner should ask the Agent to issue a written information request to both track the course of the examination and verify that the taxpayer is complying with these requests.

If there is a dispute over a legal issue, the practitioner should provide any relevant legal authority which supports the taxpayer’s position. The Agent, however, does not have the authority to act contrary to a stated IRS position. Thus, even if the practitioner presents strong legal arguments, the Agent may still choose to propose an assessment.

In most cases, the statute of limitations for the IRS to assess additional taxes is three years from the date when the taxpayer filed the tax return. Sometimes, during the course of an audit, the time for assessing additional taxes is close to expiring. If the Agent believes he or she will not complete the audit with enough time for the taxpayer to appeal the determination, he or she may ask the taxpayer to voluntarily extend the statute of limitations for assessment. If the taxpayer does not extend the statute of limitations, the Agent will usually issue a final report and assess any additional taxes and penalties based on the information the Agent collected to that point.

Whether to extend the statute of limitations for assessment is a judgment call. If the practitioner is making progress with the Agent in a timely manner, extending the period will most likely be the best decision as it leaves the period open for later adjustments in the taxpayer’s favor. If the Agent is delaying, searching for more adjustments, or simply harassing the taxpayer, the practitioner should ask the Agent to complete the final report so the taxpayer can file an appeal. A practitioner must examine all implications, good and bad, before refusing to sign an extension.

At the end of an examination, the Agent will issue a final report. This final report will show all of the adjustments, and any proposed refund or additional tax and penalty. The Agent should send the “30-day” letter with the final report. The 30-day letter provides a taxpayer 30 days to accept an Agent’s final report or request an appeals hearing, in writing, with the IRS Appeals Office. If the statute of limitations for assessment is about to expire, instead of issuing the 30-day letter, the Agent will issue a Statutory Notice of Deficiency. The Statutory Notice of Deficiency allows the taxpayer to file a petition in United States Tax Court if he or she does not agree with the Agent’s determination.