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What do you do upon receiving a letter from the IRS stating your tax return has been selected for audit. The letter states you have 10 days to schedule an appointment with the auditor. The letter describes the issues to be reviewed during the examination and includes an Information Document Requests (“IDR”).
“It is normal to have anxiety upon learning the IRS has selected your tax return for examination”
Do you need Representation?
Taxpayers have a right to retain representation when dealing with the IRS. A taxpayer can only benefit from retaining an experienced professional to handle an audit. However, retaining representation is expensive as professionals charge hundreds of dollars per hour. So, does it make sense to hire a professional to represent you? It depends, what is your exposure? To illustrate: If the IRS is examining your Schedule C deductions, what would be the proposed tax adjustment if these expenses were disallowed? Then compare that to the cost of retaining representation. It does not make sense to pay a $10,000 retainer, if the proposed audit adjustments will be no more than $5,000. However, it usually will make financial sense to retain representation.
It is important to understand that retaining a professional will not change the facts or the tax return under examination. To illustrate: if the taxpayer has no documentation to substantiate deductions, any retained representative will also not have the needed documentation to substantiate deductions.
If you prepared the tax return under audit [a self-prepared return]. We recommend that you bring a copy of your tax return and examination notice to an experienced tax professional for review. Many tax professionals provide a free consultations and will be able to spot problem(s) with your return.
Three Professions Authorized to Practice Before the IRS
There are 3 categories of professionals authorized to represent you before the IRS.
1- Attorney: Licensed by state courts [the state bar]. Generally, they have earned a degree in law and passed a bar exam. Attorneys generally have on-going continuing education and professional character standards.
2- Certified Public Accountant: Licensed by state boards of accountancy. Certified public accountants have passed the Uniform CPA Examination. They have completed a study in accounting at a college or university and also met experience and good character requirements established by their respective boards of accountancy. In addition, CPAs must comply with ethical requirements and complete specified levels of continuing education in order to maintain an active CPA license.
3- Enrolled Agent: Licensed by the IRS. Enrolled agents are subject to a suitability check and must pass a three-part Special Enrollment Examination, which is a comprehensive exam that requires them to demonstrate proficiency in federal tax planning, individual and business tax return preparation, and representation.
Some Benefits of Retaining Representation:
- You will not be speaking directly to the IRS. If your representative is a tax attorney any communication between you and the attorney will be protected by attorney-client privilege. This benefit is exclusive to attorneys.
- The tax professional representing you will have experience handling tax return audits.
- Your representative will be responding to IRS correspondences on your behalf.
Should You Rely on the Tax Return Preparer for Representation?
If you used the services of a professional to prepare the tax return at issue, you may believe this professional will stand by his tax return and handle the audit. You also believe the tax return preparer is the best person to defend your tax return under examination. This is not always the case!
The tax return preparer is unable to represent you (not authorized to practice before the IRS).
If the tax return preparer did something wrong. Do you want your representative defending you or defending themselves during the examination? [tax return preparers are subject to preparer penalties].
If the tax return preparer does not have experience representing taxpayers under IRS examination.
It is important to have the tax return preparer cooperate during the examination. A good tax return preparer will keep workpapers that include calculations and backup for positions taken on the return. If the tax return preparer does not have workpapers or will not cooperate you should look elsewhere for representation.
Retaining an Experienced Tax Attorney
Not all CPAs/Attorneys have the background or experience representing taxpayers under examination. Peter E. Alizio is a CPA who spent years preparing tax returns before becoming a tax attorney. Peter has experience representing clients that have tax returns under IRS examination.
The approach taken at Alizio Law, PLLC is to review the tax return under examination for potential issues [egg shell issues]. We discuss any issues and potential exposure with the taxpayer. We will prepare and submit a document package making it easy for the auditor to allow deductions. If you need assistance with an IRS matter, Alizio Law offers a no cost initial consultation.