An IRS audit can be a stressful and confusing experience. Many people would rather have a root canal or sit next to a crying baby on an 18-hour flight than go through an IRS audit.
The Internal Revenue Service (IRS) conducts audits to verify the accuracy of tax returns. While most audits are routine, they can still be complex and raise concerns for taxpayers.
“There’s something about an IRS envelope in the mailbox that can really ruin your day,” says Steve Powell of Powell Tax Law. “No matter what type of audit you face, the decision to engage the services of a tax professional is the smartest decision you can make.”
The Importance of IRS Audit Preparation
An IRS audit involves the IRS examining your tax return and supporting documentation to ensure you reported your income and deductions accurately.
Being prepared is key to navigating an audit smoothly. This means having all your tax documents readily available, understanding the audit process, and knowing your rights.
However, tax laws and regulations can be intricate, and the audit process itself can be daunting.
“Even if you face a simple correspondence audit from the IRS and you’re sure you’ve got all the supporting documentation in order, it is a very good idea to meet with a tax attorney to discuss your case before you send everything in for review,” says Powell. “Our experience has taught us that a thorough response is the best response to an audit.”
IRS Expects Audit Activity to Surge in Coming Years
The frequency of IRS audits has fluctuated in recent years, but the agency reports that its number of audits is about to surge with $80 billion in new funding from the Inflation Reduction Act (IRA).
“The IRS says it is about to ramp up audits as it cracks down on tax cheats and seeks to deliver more revenue into the U.S. Treasury's coffers,” CBS News reported in May 2024. “The IRA money has helped the IRS answer more taxpayer calls during the tax season that just ended on April 15, as well as beef up its enforcement, which led to the collection of $520 million from wealthy taxpayers who hadn't filed their taxes or still owed money, it said.”
In a press release, the IRS said that the increased audit activity will focus on the wealthiest taxpayers, larger corporations, and large, complex partnerships by sizeable percentages for the tax year 2026:
- The plan highlights that the IRS will nearly triple audit rates on large corporations with assets over $250 million to 22.6 percent in the tax year 2026, up from 8.8 percent in the tax year 2019.
- The IRS will increase audit rates by nearly ten-fold on large, complex partnerships with assets over $10 million, going from 0.1 percent in 2019 to 1 percent in the tax year 2026.
- The IRS will increase audit rates by more than 50 percent on wealthy individual taxpayers with total positive income over $10 million, with audit rates going from an 11 percent coverage rate in 2019 to 16.5 percent in the tax year 2026.
- At the same time, the IRS continues to emphasize that the agency will not increase audit rates for small businesses and taxpayers making under $400,000, and those rates remain at historically low levels.
Certain factors can raise red flags for the IRS and increase your chances of being audited. These include:
- Large discrepancies between reported income and expenses.
- Unreported income, such as from freelance work or the sharing economy.
- Claiming excessive deductions or credits.
- Inconsistent reporting across tax years.
Understanding Tax Attorneys
A tax attorney is a lawyer specializing in tax law. They have a deep understanding of the complex federal and state tax codes and regulations.
To become a tax attorney, one must:
- Earn a Juris Doctor (JD) degree from an accredited law school.
- Pass the bar exam in their state.
- In some cases, complete a Master of Laws (LL.M.) degree in taxation.
Tax attorneys at Powell Tax Law possess extensive knowledge in various areas related to tax law and audits, including:
- Individual income tax
- Business and corporate tax
- Estate and gift tax
- International tax
- IRS audit procedures
Advantages of Hiring a Tax Attorney for an IRS Audit
There are numerous benefits to hiring a tax attorney when facing an IRS audit. Here's why:
- In-depth knowledge: Tax attorneys have a comprehensive understanding of tax laws and how they apply to your specific situation. This allows them to navigate the audit process confidently and advocate for your best interests.
- Experience with the IRS: Tax attorneys have extensive experience dealing with the IRS and understand their procedures and communication styles. This knowledge is invaluable in navigating the complexities of an audit.
- Client representation and rights protection: A tax attorney can represent you during all stages of the audit, ensuring your rights are protected throughout the process. They can also communicate with the IRS on your behalf, freeing you to focus on your regular activities.
- Minimizing penalties and resolving disputes: Tax attorneys are skilled negotiators who can work with the IRS to minimize potential penalties and resolve any discrepancies efficiently.
Types of IRS Audits and What They Involve
The IRS conducts different types of audits, each with its own specific characteristics. Here's a breakdown of the four main types:
Correspondence Audits
- Definition and Process: A correspondence audit is the most common type. The IRS initiates contact through mail, requesting additional documentation or clarification on specific items on your tax return.
- Common Issues Addressed: These audits often focus on relatively minor discrepancies, such as mathematical errors, missing information, or questionable deductions.
Office Audits
- Definition and Process: An office audit involves meeting with IRS agents at a local IRS office. You will be asked to provide documentation and answer questions regarding your tax return.
- What to Expect: Come prepared to explain your income sources, deductions, and credits. Your tax attorney will guide you through the process and ensure you understand every question before responding.
Field Audits
- Definition and Process: A field audit, also known as a "home audit," takes place at your business or residence. These audits are more complex and involve a thorough examination of your financial records.
- Complexity and Scope: Field audits often involve significant tax liabilities or complex business structures. A tax attorney is crucial in navigating this intricate process and protecting your interests.
Random Audits
- Definition and Process: Random audits are precisely that - selected at random by the IRS computer system. While less common than other types, they can still occur.
- How Taxpayers are Selected: The IRS uses a statistical sampling method to select tax returns for random audits. There is no specific red flag that triggers a random audit.
How a Tax Attorney Can Assist in Each Type of Audit
No matter what type of IRS audit you face, a tax attorney from Powell Tax Law can be your trusted advisor:
- Correspondence Audits: We can help you understand the IRS inquiry, gather the necessary documentation, and respond in a clear, concise, and accurate manner.
- Office Audits: We will accompany you to the audit meeting, ensure you are comfortable with the process, and advocate for your best interests during questioning.
- Field Audits: Our attorneys will guide you through every step of the complex field audit process, reviewing documents with you, negotiating with IRS agents, and ensuring all your rights are protected.
- Random Audits: Even though random audits are less about red flags, a tax attorney can still provide valuable assistance. We can explain the audit process, ensure your rights are protected, and answer any questions you may have.
An IRS audit, while stressful, doesn't have to be a daunting experience. By understanding the different types of audits, the importance of preparation, and the significant benefits of having a tax attorney on your side, you can navigate the process with confidence.
If you are facing an IRS audit, contact Powell Tax Law's team of experienced tax attorneys for a consultation and help in achieving a successful and favorable outcome.