If you have prepared your corporate tax return truthfully, notice of an IRS audit should not make you nervous. After all, IRS employees are only doing the job we pay them to do. In any event, it pays to be cooperative.
“Be prepared if the IRS shows up for an audit,” says A. Lavar Taylor, Of Counsel to Shulman Hodges & Bastian LLP. “Then, treat the agent or agents with respect.”
Smart Business talked to Taylor about IRS audits and the various types of IRS agents who may show up at your front door.
Where is the IRS currently concentrating its audit efforts?
The IRS wants to maximize its efforts, so agents are investigating more corporate and high-income taxpayers, foundations and 501(c)(3) charitable organizations a base that generates more dollars and has a bigger impact compliancewise.
There was a big change 10 years ago when a new law required the IRS to reorganize and follow new procedures, so audits pretty much stopped for a couple of years. Now, agents are used to the new procedures, which are seemingly kinder and more transparent. So the pendulum has now swung back in the other direction and more audits are being done.
How should I deal with the IRS in an audit?
Generally speaking, the IRS is becoming more difficult to deal with, mostly because a huge percentage of its experienced employees are retiring.
Still, you should always treat IRS agents as human beings. I have been involved in a number of cases where people put the IRS agents in a dark room and turn up the heat, and it does not work well at all. The agents like to be respected, even when they are taking actions that you may think are unnecessary.
Technically speaking, they are not supposed to ask for information that they already have or information that is difficult for you to access or information that is of marginal relevance. However, if you do not cooperate, they could decide to open up another year for audit or open up personal returns of corporate officers.
Agents have lots of power. If they went to court, they could theoretically obtain more access, so if you choose to take a hard line, do so only after carefully considering the consequences.
When should I get an attorney involved in an audit or a dispute with the IRS?
Being proactive will help avoid a lot of problems down the road. The prudent practice is to have somebody vet your tax return. An analysis needs to be undertaken well in advance to see if there are any problems.
If you are consulting a good attorney, you should talk about whether there is even a need for an attorney. Involving an attorney sometimes can be counterproductive. Sometimes, though, there are difficult issues and having an attorney involved is not a big deal.
An attorney experienced in tax disputes can spot issues, advise you on how any court actions may turn out and advise you of steps you can take during the course of the audit to minimize chances of losing disputes.
What IRS agents might pay me a visit?
Revenue agents conduct audits, revenue officers collect money, and special agents develop criminal cases.
A revenue agent is not supposed to show up unannounced. Except in extremely unusual circumstances, you will first get a letter from the IRS. In that situation, you cooperate if you have a high comfort level in your original tax return. I would never recommend a company handling an audit without using an accountant.
A collection officer almost always shows up unannounced. However, typically, first there will be billing notices. You will know there is a problem, so it will not be a complete surprise. Clearly, call an accountant or attorney with experience in handling those types of matters.
What should I do if an IRS special agent wants to talk to me?
No matter what he says or how he presents himself, the job of a special agent is to develop criminal cases. You do not want to talk to him.
The government is ramping up its criminal cases especially white-collar tax cases to hold up as examples. So when a special agent shows up, keep the fact that he is a criminal investigator foremost in your mind. Just smile and say, ‘Have a nice day. My attorney will be in touch with you.’
What if I am unhappy with the results of an audit?
Administrative and judicial appeals can be made through an accountant or an attorney. In my line of work, they are common. But from a business standpoint, most corporate executives like to get the audit resolved at the lowest level possible. If that cannot be done, ultimately, you can go to tax court or district court to challenge the liability.
A. LAVAR TAYLOR is Of Counsel to Shulman Hodges & Bastian LLP. Reach him at (949) 340-3400 or firstname.lastname@example.org.