Myth No. 1 – The IRS knows everything about you AND whatever they don’t know you are required to reveal to them.
When you are notified of a tax audit the IRS will generally request you bring or provide certain documents that pertain to the audit.
You should bring only the documentation requested and nothing more—unless you are certain that it will assist you in presenting your side of the financial story. If the IRS audit notice asks for something you cannot produce, simply try to find other favorable documentation and provide it instead. But be prepared to explain why you could not bring the requested documentation.
Do not just bring ‘everything’ to the audit. First of all the auditor is busy and it is unlikely that he or she wants to sit rummaging through your box (or boxes) of receipts and check stubs, etc.. In addition, you are not obligated to provide everything, so why do it? Just bring to the audit and/or provide what is asked of you, period. The only exception to this, as already discussed, is if you have something that will tend to clear things up in your favor.
Also, be as organized as possible; IRS auditors are human believe it or not. If the auditor see that you maintain your records reasonably well they are less likely to think you are careless about your tax preparations than if you show up with a shopping bag full of scraps of paper.
Myth No. 2 – All tax deductions must be supported by a written receipt or canceled check.
Some IRS auditors may try to make you believe that you are required to have a physical paper receipt or canceled check to claim a deduction. But this just isn’t so.
While this may have some legitimacy when talking about your personal deductions, it is wholly untrue when it comes to your business deductions. You must, of course, to some reasonable degree substantiate your deductions. But the IRS actually allows you to keep your own detailed records instead of receipts for allowable business deductions that are each $75 or less.
In fact, the IRS itself recommends you keep a diary or written journal of the following information:
- Who was paid
- How much was paid
- How you paid (credit card, cash, check number)
- The date of the transaction
- What the expense was for (office supplies, equipment, utilities, rent, entertainment, tips, cab fare, copies)
- Names of any other people involved
And get this, even if you failed to keep such records contemporaneously, you may reconstruct this information and/or introduce affidavits in support of your claim for business tax deductions.
This does not mean that you can just make things up. You cannot and should not. But if you are honestly entitled to the deduction(s) don’t be afraid to claim them even if you don’t have a receipt of canceled check.
Myth No. 3 – When the IRS schedules an appointment for your audit you must drop everything and go.
While many audits are conducted via mail, that is, by your mailing the agency the requested documents you may be called to physically appear for an IRS tax audit. In such cases this is nothing akin to a subpoena to appear in court. You need to treat this as the agency’s suggested appointed time and not a demand. You have every right to request additional reasonable time or to reschedule because of a personal scheduling conflict. The key here is communication and reasonableness.
By the way, if you prefer, you may even request that the audit be completely via the mail As long as you cooperate fully in providing the IRS with details of your claims, you can conduct an audit through the mail and never have to worry about a face-to-face confrontation.
One big advantage of having the audit by mail is that you get to think long and hard about your responses and supporting evidence well in advance of the audit. Having the audit conducted by mail will be less stressful to and will avoid worrying about blurting out some stupid statement that may end up getting you in hot water.
Myth No.4 – The IRS auditor’s decision is Final and cannot be challenged…if you know what’s good for you.
If you are audited and you disagree with the IRS tax auditor, you may invoke your I Right of Appeal to get a review of the auditor’s decision. In fact, the IRS encourages you do this in cases were you honestly feel the tax auditor made an erroneous determination. The tax auditors decision is not in fact final so never be afraid to appeal—it could save you a lot of money.Believe it or not, according to the agencies own published reports, when IRS tax audits are appealed, the decisions made by IRS tax auditors is wrong more than half the time.
Fighting the IRS in U.S. Tax CourtYou may wish to appeal or petition the U.S. Tax Court to review decision made by an IRS tax auditor. While you should never bring a frivolous case to court, if you feel you have been wronged and can provide reasonable evidence in support of your claim, statistics show that taxpayer who exercise their right to appeal auditor decisions have an excellent chance of willing. In addition, when the IRS sees that you’re serious and are prepared to litigate and present evidence they will frequently negotiate with you rather than go to trail and expend the agency’s resources—particularly if your case has merit. It is advised that you consult with a tax attorney before proceeding before the U.S. Tax Court.
Myth No. 5 – You don’t need a tax professional.
Look, the bottom line is that U.S. Tax Law is very confusing. If you’re going it alone, don’t be foolish. Know when its time to call in the big dogs. One thing a tax lawyer or CPA can do for you is to end your stress almost immediately. Once you and you tax professional notify the IRS that you are represented, the IRS will no longer call or write you. All correspondence and calls will go directly to your tax professional—your nightmare can be over that quickly.
Another reason to consider getting a tax attorney or CPA early on is that they can help you to avoid waiving your rights—they may even negotiate a great tax settlement or offer in compromise for you if you need it.
As crazy as it sounds, it is almost always better to have a tax professional negotiating on your behalf. And when you consider that IRS tax auditors have huge case loads and would just love to lighten their load a bit, a tax lawyer may very well convince them why dropping or settling your case may be the perfect solution for all involved.
Peter J Loughlin
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