Get expert tax audit defense if the IRS flags your return.
Just when you think tax season is over and you don’t have to worry about tax returns until next April, a letter arrives in the email with the IRS seal in the corner. Your heart drops. You paid your taxes on time, and you trusted your tax preparer. You were sure they helped you to file everything accurately.
You open the envelope. It’s a CP06 Notice from the IRS. The CP06 letter is the Initial Contact Letter from the IRS indicating that your tax return has been flagged for an audit.
Before you panic, it’s important to take a step back, understand what this means and, most importantly, know that you are not alone. Before we dive into who can represent you during an audit, let’s explore the types of audits, what they mean, and how to take steps to avoid one.
IRS Uses Additional Funding to Ramp Up Audits – Could You Be a Target?
Under the Inflation Reduction Act, the IRS received an $80 billion cash infusion designed to bolster staff. The IRS has also implemented artificial intelligence and machine learning. With the added infrastructure, the agency plans to increase the frequency of audits by more than 50% on individuals with more than $10 million, the agency announced in a May 2024 news release.
The IRS insists it won’t increase audit rates for taxpayers with income lower than $400,000 or for small business owners. But the risk of an audit always exists, especially if your tax returns show common audit red flags.
Will The IRS Flag Your Return?
Regardless of how much or how little money you make, your tax return might be flagged for an audit if it exhibits certain red flags. The IRS uses random selection and computer screening to choose returns based on “norms” of similar returns. Your tax return could be flagged for an innocent reason, or the IRS may suspect you were trying to evade taxes and wants to verify your records against your returns.
Math errors
Math errors may sometimes lead to an IRS audit. In the absence of other red flags, it’s more likely the IRS will fix the mistake and send you a letter indicating the new amount of your tax refund or tax bill.
Under-reported or Inconsistent Income
If your income is wildly higher or lower than prior years, it might flag your tax return for an audit. Similarly, if the IRS received 1099s from your clients and you failed to report that income or under-reported the amount you made as an independent contractor, the IRS may audit you. However, failing to report a single 1099 isn’t likely to result in an audit. Instead, you might receive form CP2000 – Notice of Underreported Income. You may need to pay additional taxes.
Claiming Certain Tax Credits
In recent years, the IRS has started taking a closer look at taxpayers who claim certain credits, particularly the Earned Income Tax Credit, Child Tax Credit, and the American Opportunity Tax Credit.
If you deserve these credits, you should claim them. But be certain you have the proper documentation in case your return is flagged for an audit.
Disproportionate Tax Deductions
If you are an independent contractor filling deductions on a Schedule C, taking too many tax deductions for business expenses could be a red flag. For instance, it wouldn’t look strange for an Uber driver to claim their vehicle, service, maintenance, and even car washes as a business expense. But someone who works from home as a graphic designer or virtual assistant may not have those same deductions.
Colleagues, Clients, or Business Partners Being Audited
If you have a client, business partner, or investor who has been flagged for audit, the IRS may flag your return as part of “related examinations.”
Types of IRS Audits
There are three types of IRS audits to be aware of. You may want to seek help from a tax professional regardless of the type of audit, although a correspondence audit dealing with one or two items on your tax return may not require professional help.
Correspondence Audit
A correspondence audit is done entirely by mail and typically involves one or two items on your tax return. For instance, if you failed to report 1099 income, the IRS may call for a correspondence audit to verify your income. Other reasons for a correspondence audit might include:
- Earned Income Tax Credit verification
- Items related to Schedule C business tax deductions
- American Opportunity Tax Credit
If you are unsure about how to answer the questions in your correspondence audit, a tax professional can help you identify the correct paperwork to submit.
IRS Office Audit
An IRS office audit is far more extensive and involves several items on your tax returns. During this audit, you’ll need to bring relevant paperwork to an IRS office and meet in person with IRS examiners. You have the right to bring an audit representative.
IRS Field Audit
During a field audit, an IRS agent visits your place-of-business and may ask to review profit and loss statements, bank statements, receipts, and other accounting records.
What Happens During an IRS Audit
The type of audit you have will determine what you should do and what happens next.
By Mail
If you receive a letter requesting a correspondence audit, make sure to reply by the deadline on the letter. If you need more time to gather your records or find audit representation, you can request more time.
In Person Audits
During an in-person audit, the IRS examiner while discuss various aspects of your business, including your financial history and business operations. You can enlist the help of a CPA, enrolled agent, or tax attorney to gude you through this process, act as your power of attorney, and answer questions on your behalf.
Once the IRS representative completes the interview and you submit any requested documentation, the IRS will either accept your original return, request an amended return, or asks for more information. You can appeal the final decision if you don’t agree.
How Alleviate Tax Can Help If You Are Being Audited
Alleviate Tax has decades of experience and a team of California tax attorneys, along with CPAs and IRS enrolled agents who can assist during an IRS audit.
Our representatives understand what examiners can and cannot do, and questions they can ask, during your audit. They understand how to explain the information on your returns and in your financial documents to help prove your errors were innocent mistakes, while also helping to minimize your tax liability, if possible.
Dealing with auditors can be scary and intimidating. Let the experienced professionals at Alleviate Tax handle this burden so you can continue running your business or focusing on your life during this stressful time.
FAQs
Who can represent you in an IRS audit?
An IRS enrolled agent, a certified public accountant or a tax attorney can represent you during an IRS audit, whether or not that individual prepared your tax return.
What does audit representation do?
When you enlist the help of a tax professional to represent you during an audit, that person will engage with the IRS on your behalf. Your representative can help you gather the appropriate paperwork, challenge the auditor’s findings on your behalf, and help you file an appeal if you disagree with the outcome of the audit.
How much does IRS audit representation cost?
Depending on the complexity of the audit, IRS audit representation costs typically range from $5,000 to $10,000 or more.
Do I need a lawyer if I get audited by the IRS?
A tax attorney licensed in your state can provide audit representation. You can also hire an enrolled agent or a CPA as your authorized representative during an IRS audit. Alleviate Tax has a team of California tax lawyers, IRS enrolled agents, and CPAs on staff to assist you during an audit.
