Why Am I Being Audited?
Often asked in mournful tones, it’s a question we hear from new clients all the time: “Why am I being tortured with an audit?”
Here is a look at a couple reasons why you may be facing an IRS audit:
1. Matching notices:
A matching notice is not exactly an audit per se, but the difference can be confusing. The IRS computer system produces a matching notice (or CP2000 letter) when a line on your income tax filing doesn’t match the information the IRS received from third parties (e.g., your employer, bank, broker, etc.). The IRS assumes it’s computer is correct and that your tax filing is incorrect, and calculates the additional tax, penalties and interest caused by your supposed error. These notices are often wrong.
Timely responding to these matching notice adjustments is critical because you may lose your right to contest or correct the IRS’s position.
As an example, we recently reviewed a matching notice for a taxpayer who reported their individual retirement plan distributions on the pension distribution line. Reporting the correct amount on the wrong line generated a large, matching notice.
2. Audit selection:
The IRS uses an audit selection technique based on statistical samplings of randomly selected tax returns. The program is called the Discriminant Function, or “DIF” system, and all tax returns are scored with a DIF score. The IRS uses sixty-six (66) factors, some well known, some are secret and based on our experience of dealing with many audits over the years, we can often say what likely triggered the audit. If your tax return scores too high, it will then be selected for audit. Depending upon the issue at hand and the form under scrutiny, the return might receive one of the following:
a.Mail-in audit: For a mail-in audit, the IRS simply sends a demand letter requesting proof of the expenses you claimed on the tax return. This is most common with itemized deductions on Schedule A such as medical expenses or charitable contributions.
b. In-office audit: Taxpayers can be ordered to visit a IRS office to answer questions and have the IRS review their tax returns and back up documents in person. Before the meeting, the officer may send an Information Document Request (“IDR”) to tell you what they want to see during the audit. This in-person meeting is intimidating for many people and the auditors are trained to utilize a variety of tactics, from confrontational to trust building techniques when conducting the audit. Besides the tactical considerations of having a tax attorney represent you, may people simply prefer the peace of mind that comes with competent representation.
c. Field audit: The IRS may choose to conduct a ‘field audit’ whereby the IRS auditor comes to your house or business to conduct the audit. While the above referenced in-office audit might seem intimidating, having the auditor camp out in your business for several days or longer is far worse. These audits tend to be more involved and the initial audit can last several days or more. Further, the information and assumptions that the IRS agent is able to obtain by visual inspection and overhearing conversations, can aggravate your audit situation.
For instance, we once had a client retain us after the IRS had conducted a Field Audit. The IRS agent saw the client’s beautiful chandelier and his audit findings reflected unreported income because he was sure that the taxpayer could not have afforded the item based on the tax return filed.
In that client’s case we were able to prove that the chandelier was a wedding present, however, case example serves to show how an audit can quickly escalated into something more.
At the end of the audit, one of three outcomes are possible:
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- No Change Result – the IRS has accepted your tax return as filed,
- A tax deficiency determination: the IRS assesses tax, interest and penalties. At this point, it is often worth appealing the audit determination to the Tax Court. In fact, there are many avenues to pursue after the deficiency notice has been issued including an appeals process and even taking the dispute to Tax Court. We have appealed thousands of cases and can handle your case, however deemed most appropriate, i.e., appeal, Tax Court, or both, if necessary.
- Referral to Criminal Investigation Unit – See below.
3. Criminal Investigation Division: A high percentage of cases that end up in the criminal investigation division originate from IRS civil audits. During the audit, the agent notices a severe lack of documentation or a large amount of potentially unreported income. At that point, he can pull in a Fraud Officer to offer the IRS auditor advice on how to proceed, what questions to ask, what documents to demand. This can be a delicate situation for the taxpayer as the auditor isn’t required to tell you that the Fraud Officer has become involved until the case has been formally referred to CID. The result can be that the taxpayer unwittingly helps the IRS assemble their case against him.
Unfortunately, it is also possible to end up with CID directly through a whistleblower program at the IRS. Yes, that’s right, someone can turn you in to the IRS and receive a whistleblower payment of thirty percent (30%) of the recovered taxes. turned in by your friends, associates or often your bank.
4. Foreign Account Tax Compliance Act (FATCA): The IRS has been aggressively pursuing tax fraud involving overseas accounts for many years. The latest weapon in their arsenal is FATCA, which has coerced foreign banks to turn in U.S. taxpayers with foreign accounts. Starting in 2013, your “secret” foreign account will be reported to the IRS by the bank you trusted to keep it a secret. Our expectation is that this will dramatically increase the number of audits and criminal charges brought against of such taxpayers, once they are discovered. These FATCA referrals may proceed through the normal civil audit channels or if these cases may go directly to the CID. If you have such unreported accounts, we strongly recommend contacting our law office immediately before the end of the year to rectify the problem before the foreign institutions turn you in and its too late.
Dealing with the IRS can be an intimidating experience, but we handle these issues every day. From simple notices to complex overseas audits, our tax attorneys and CPA’s can deal with your case efficiently and professionally to get you the best possible result. Please call our law office immediately if you have any tax wrongdoing and immediately upon receiving any notices from the IRS or State. Remember, you don’t have to talk to the IRS or State or you can have your attorney do it for you. We are experienced, aggressive, and accessible.