I’m often asked by California business owners and taxpayers the best way to handle an IRS audit. While receiving an initial audit letter from the IRS often evokes panic, the audit process is really not something you need to fear. It’s a fairly common practice and, when you work with an experienced tax attorney, you can get through the experience unscathed. I receive so many questions from San Francisco business owners and taxpayers asking about IRS audits in California. Here are my suggestions for how to handle an IRS audit in California.
Step 1: Do not panic when you receive an audit notice. The IRS will notify you by mail and that letter will include details about the items under review and instructions on how to respond. The IRS has three types of audits: correspondence, office and field. The correspondence audit is the most common and that’s handled by mail and is usually somewhat simple. The office audit is when you will need to visit a local IRS office. Finally, the field audit is when the IRS visits your home or business. Take the time to read the audit letter carefully and make note of the deadlines.
Step 2: Gather and organize your records. The audit notice will include the documents the IRS is requesting. Take the time to gather all the documents the IRS is requesting. This typically includes W-2s, 1099s, bank statements, receipts, mileage logs, and more. I always advise my clients never to provide more information to the IRS than what’s requested. You may think you are helping by gathering additional documents. However, the best rule is to only give the IRS the exact documents they request.
Step 3: Consider hiring an experienced professional to help you. You have the right to representation in an IRS audit. You can hire an experienced tax attorney, a CPA or an enrolled agent. Those individuals, especially a tax attorney, can handle communication and negotiation with the IRS on your behalf. Keep in mind that when you hire an attorney, you have an attorney-client privilege. There is no client confidentiality between you and your accountant or tax preparer. When you hire a lawyer, you are allowed to freely communicate with your lawyer. If you face any criminal charges, your tax preparer or accountant will not provide this same protection. In most cases, he or she will be compelled to testify against you.
Step 4: Respond promptly and accurately. Your tax attorney or tax professional should help you draft a clear and professional response to the IRS. Make sure the response is honest and is submitted in plenty of time before the deadline the IRS imposed. You also want to make sure you do not “overshare” beyond what the IRS asks of you.
Step 5: Review the audit results. The IRS will notify you of your audit results, which will generally fall into three categories: no change, refund or additional taxes owed. There is an IRS appeals process if you do not agree with the IRS’ findings. However, not everyone has the right to appeal an IRS audit. There are generally three rules that govern whether you can appeal, and all three must be present. First, you receive a letter from the IRS stating that you have the right to do so. Second, you do not agree with the IRS’s decision with respect to your audit. Third, you did not sign an agreement form sent to you by the IRS. If all of those are true in your case, then you may request an Appeals hearing. To do that, complete your appeal and mail it to the address that is included in the IRS letter. You may want to consider having a tax attorney represent you in your appeal.
IRS audits can be scary and confusing. But it’s helpful to understand they happen every day to many California taxpayers. The best thing to do is work with an experienced California tax attorney or professional who can advocate on your behalf with the IRS and make sure your taxpaying rights are protected.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
