The IRS and their “audit techniques.” What you should expect !!!!
Most taxpayers walk into an IRS audit having no clue about what to expect.
It is a hornet’s nest they are getting themselves into.
Being a former IRS agent, I would love the taxpayer who has no clue about what was going on because you can have your way with them. Today, it would not be wise to walk into an IRS audit situation unless you are absolutely sure there are no problems with your return.
If you know that to be a fact, you can boldly walk into the IRS office fearing nothing and you do not need a professional whatsoever. However, if you think there is a problem, pay the money because it is your saving in the end.
A smart professional can avoid penalties and interest and having the IRS pick up others years. Think through your situation.
As the IRS process starts….
The first thing the IRS agent will do is an analytical test. It is a review of the tax return, balance sheets and canceled checks. The agent takes a common sense approach into all available evidence. Secondly, the IRS agent will look at all documentation to help determine and substantiate items claimed on the tax return.
The Agent will next interview the taxpayer or third parties that may be able to shed more light on the subject audit. The IRS agent will physically inspect the taxpayers assets, inventory or securities.
The agent will observe the business by taking a tour and the owner’s reaction to statements and claims throughout the whole process. Lastly, the IRS agent starts the testing process of all books and records to make sure the tax return is true and correct.
Interviews: Authority and Purpose of the Internal Revenue Service
Internal Revenue Code Section 7602 authorizes the Secretary or a delegate to examine books and records and to take testimony under oath.
Oral testimony is a significant factor in resolving tax cases. Oral testimony can be taken at the discretion of the IRS agent. the IRS will always send out an initial tax letter usually stating the tax items under examination.
Who does the Interview?
Internal Revenue Code Section 7521(c) states that an examiner cannot require a taxpayer to accompany an authorized representative to an examination interview in the absence of an administrative summons. do not let the IRS Agent bully you in this. Hold your ground. Let your tax representative handle the tax audit.
However, the taxpayer’s voluntary presence at the interview can be requested through the representative as a means to expedite the examination process.
If the IRS agent can get the taxpayer by themselves the agent will have a field day. Representatives are a key to shielding off problems.
The Power of Attorney and the possible bypass of the “power”
When a taxpayer obtains representation, a valid power of attorney, the examiner will ensure that the authorization, Form 2848, Power of Attorney , or Form 8821, Tax Information Authorization , or a similar privately designed form, is properly executed. Service personnel are prohibited from disclosing tax information of a confidential nature to any unauthorized person. A POA must be in the hands of the IRS before they will speak to any third party.
Practice before the Service is restricted to persons recognized or qualified under provisions of Circular No. 230. The IRS will not let anyone not authorized to appear on behalf of the taxpayer. If the taxpayer’s representative impedes or delays the examination by failing to promptly submit the taxpayer’s records or information requested by the examiner, failing to keep scheduled appointments, or failing to return telephone calls and written correspondence, the examiner may initiate procedures to bypass the representative and deal directly with the taxpayer or the business owner.
Where to Conduct Interviews
The time and place of interviews will be set by the IRS agent as long as they are reasonably scheduled.
Office examinations will be conducted at the Internal Revenue Service office closest to the location of the taxpayer.
Field examinations are conducted at the taxpayer’s residence or place of business, or where the taxpayer’s books and records are kept. It also can be held a the representative’s office.
Requests to Tape Record Interviews
Internal Revenue Code addresses audio recording of interviews.
Taxpayers may request to tape record an interview proceeding as long as “10 calendar days” advance notice of intent to record is provided to the Service. The taxpayer must supply his own recording equipment. The Service has the right to simultaneously produce its own recording and has the right to reschedule the interview if the Service does not or will not have equipment in place. This is rare, but happens many times on taxpayer protesters.
All participants, both IRS and the taxpayer must consent to the recording of the interview.
All recorded interviews will contain the following information:
1. The date, time, and place of the interview,
2. The taxpayer’s name and social security number or business ID number
3.Identification of all participants on the recording, along with a statement of each participant’s respective role in the proceedings
4. The purpose of the proceeding
5. The tax year or years under examination or audit
6.A clear description of written documentation provided in support of the issues
At the conclusion, a statement indicating the total recording time for the interview and that the interview has been completed and the recording is ended.
Types of IRS Interviews
Initial Interviews. The initial interview is to be held as soon as possible after the IRS agent opens a case.
Subsequent Interviews. Subsequent interviews with the taxpayer should be held if and only if:
The taxpayer does not provide all the information that the IRS requested;
More detailed explanations are needed;
A review of the IRS agent’s examination progress is needed. The review should address information provided to date as well as outstanding information needed to complete the audit.
Closing Interviews. Closing interviews should be held to go over any proposed adjustments, and a signed agreement should be obtained.
Interview Techniques used by the Internal Revenue Service Audit Agent
Interviews provide information about the taxpayer’s financial history, business operations, and books and records that are not available from other sources. Interviews should be used to obtain information needed to make informed judgments about the scope and depth of the examination and correctly resolve issues or look into other possible issues. Interviews are used to obtain leads, develop information, establish evidence and to find out the credibility of the information that the taxpayer is providing.
It is important to create an environment where the taxpayer feels comfortable. Examiners should maintain a friendly and professional demeanor. Suggestions for establishing rapport include:
The IRS Agent should introduce themselves and give the taxpayer or representative their ID or badge number;
The IRS Agent should always explain what will happen during the examination or audit;
The IRS Agent should be prepared to explain return selection procedures, rights to representation, and appeal rights. Very rarely does the IRS Agent explain the return selection process. The IRS Agent should recognize that an IRS audit is often a once-in-a lifetime experience for the taxpayer and therefore the taxpayer may be tense or nervous. This is never the case. The taxpayer is always worried to death.
The IRS Agent should exhibit openness, honesty and be calm and objective as possible. This is not a time of emotion.
The IRS Agent should always be prompt and courteous.
IRS can conduct at the place of business. Authority to Conduct Tours of Business Sites
” Regulation 301.7605–1(d)(3)(iii)” states: where an examination takes place, the Service may visit the taxpayer’s place of business or residence to establish facts that can only be established by direct visit, such as inventory or asset verification. The Service generally will visit for these purposes on a normal workday of the Service during the Service’s normal tour of duty hours.”
The IRS may do an inspection of a Taxpayer’s Residence, but their use is very limited.
The IRS Agent may consider inspecting the taxpayer’s residence. Due to privacy issues and the intrusiveness of such inspections, their use should be limited. The purpose of inspecting the taxpayer’s residence includes (but is not limited to):
Determining the validity of deductions for an office or business located in the residence.
Determining the taxpayer’s financial status.
I would always have your professional representative there, review the walk through before the IRA agent arrives, make it a short, sweet and fast walk through. This rarely happens though.
Tours of Business Sites
The physical observation of the taxpayer’s operation, or tour of business site, is an integral part of the examination process. In viewing the taxpayer’s facilities and observing business activities is an opportunity to:
Acquire an overview of the business operation;
Get a feel for the business and the ownership;
Observe and test internal and external controls;
Clarify information obtained through interviews.
Cash Businesses
Many small businesses that deal almost exclusively in cash are likely to have few internal controls. Practically all income is received in cash. No independent third parties review the operation. Many expenses are paid in cash and documentation for transactions is often lacking. The IRS can and will pull industry standards and similar business records from research in the past.
The IRS has audited millions of cash businesses in the past. The IRS is trained to look for fraud and deceit. Caution should be used by all business owners in this situation and you should always have a trained professional representation.
Should you have any question regarding IRS TAX MATTERS, call us at FRESH START TAX 866-700-1040. We have tax attorneys, CPA’S, former IRS Agents ready to serve your professional needs
