JohnAlanCohan@aol.com 310.278.0203 Probate/Conservatorships IRS Audits IRS Collection IRS Appeals U.S. Tax Court IRS Criminal Investigation Tax Litigation Tax Opinion Letters Business Plans Aviation Law Tax Exempt/Nonprofit Organizations All aspects of equine and livestock law, particularly tax matters, syndications, business plans, tax opinion letters, and drafting of business documents.		Preparation for an IRS Audit by John Alan Cohan, Attorney at Law There was a 7% increase last year in individual audits, and an 8% increase in small business audits. Most of the increased revenue pertains to taxpayers who underreported income--the main area that seems to arise in audits. The IRS plans on still increasing the number of audits, particularly on people who work for themselves. Last year there was an increase of audits of taxpayers making $100,000 or more by 14% from the preceding year. This comes as the IRS faces heavy pressure from Congress to raise additional revenue to help shrink the nation’s deficit. Also, the IRS has increased audits of taxpayers involved in partnerships and S corporations, as well as “abusive” tax shelters. Tax collectors have been vilified since Biblical times. Today’s revenue agents can be very nice people--but the fact remains that their job is to raise revenue, and the IRS has an institutional bias against taxpayers who have the slightest thing wrong with their method of reporting or method of recordkeeping. Excessive business deductions by small business owners--or for that matter, most any other business owner--can trigger an IRS audit. If you are audited, the IRS will usually start with one tax year and then look back or forwards for other years to see the history of losses or profits. It’s crucial to have documentary evidence not only to substantiate the deductions, but to show how they relate to your venture, and how the records help prove that you are operating in a businesslike manner. There are several practical points that one should observe in connection with an audit of any kind:      1. First you should have your representative (an accountant, CPA or sometimes if the stakes are large, a tax attorney) find out what the IRS agent is looking for. Sometimes there may simply be some minor discrepancies that are in issue. Often the IRS will issue a Document Information Request that details what needs to be gathered together.      2. If your business records are not quite in order, be sure to straighten them out so they are in a presentable format. If you have a corporate minute book, for instance, make sure it has been updated. Make sure that any licenses and permits are in order.      3. Only provide those documents specifically requested.      4. You should not personally attend the audit, but instead delegate that duty to a representative (an attorney or qualified tax representative) because it is an adversarial proceeding and often the less you say, the better.      5. You should review the strength of your business records with your representative to insure they are organized in the best possible manner. If your business is owned by a corporation or LLC entity, the Corporate Minute Book should be reviewed to make sure it is updated. If you take deductions for business travel or entertainment expenses, you should make sure you are able to show how these comply with IRS Regulations.      6. If the IRS agent wants you to “waive” the statute of limitations, this is usually not advisable. There is no benefit to giving the IRS more time or opening up further opportunities for them to make a fishing expedition out of your tax returns.      7. Assuming you have a representative, it is usually better to let him or her meet with the auditor alone. Your presence is not required and could give the agent an opportunity to try and trip you up with difficult questions that really need to be analyzed before responding.      8. Keep in mind that the agent is not exactly an enemy, but at the same time he or she has the overriding purpose of raising revenue and looking for any opportunity to deny tax deductions.      9. If the auditor is inclined to deny your deductions and claims you owe more tax, the audit will likely proceed to future years. When the audit is finally completed, the agent will issue a written report detailing his or her findings and declaring how much more tax is due.      10. The auditor’s findings will accompany a “30-day letter,” which starts your appeals process. At this stage you should consult an attorney and decide whether to go to IRS Appeals or Tax Court. In IRS Appeals the matter is transferred to a different staff. You have a better chance of prevailing, and there are opportunities to settle the matter for a fraction of what the original auditor claimed was due. The taxpayers who succeed at the audit phase are those who have had the best tax planning. Back to Top