IRS Tax Audit Lawyer Hanover, MD
An audit by the Internal Revenue Service, sometimes call an examination, can occur for many different reasons. Frequently, an audit is triggered by a seemingly random application of a little-known algorithm: the Discriminant Inventory Function System (DIF). While the DIF typically focuses on anomalies or inconsistencies reported on a tax return, it can also be triggered by a certain level of income, a focus on new reporting procedures, or, for the unfortunate, bad luck. The DIF is a systemic means for the Internal Revenue Service to increase the results of its limited compliance resources. In addition to this mechanism, the Internal Revenue Service frequently audits potentially problematic returns reported through its Whistleblower Program, from information-sharing initiatives with other federal and state agencies, from information mismatches identified in third party reports, from identification of abusive schemes, and through a host of other means. Over time and with advances in technology, the Internal Revenue Service has become increasingly adept at selecting potentially erroneous returns with specifically identified problems. Call our IRS tax audit lawyer in Hanover, MD today!
Once a tax return or group of returns has been selected for audit, the Internal Revenue Service will generally engage in one of three types of audits: (1) a correspondence audit, (2) a desk audit, and (3) a field audit. These classifications generally correspond to the manner in which the audit was generated and/or the level of sophistication of the issues involved.
Generally, the most basic and least concerning category of examination is a correspondence audit. These exams are usually triggered by a mismatch in information reported by third parties to the Internal Revenue Service. For example, a third-party investment brokerage might report information to the Internal Revenue Service regarding investments sold in a year. If a taxpayer does not completely and consistently report the sale of the investment on its tax return – e.g., by not reporting the sale at all or by failing to include the same basis or holding information – it will likely trigger an audit notice, such as a Notice CP2000.
To rectify this potential error, taxpayers must provide correct information or otherwise substantiate the accuracy of the information already reported. Most correspondence audits do not involve technical issues or items involving an intensive review of individualized facts. With proper guidance and an understanding of the process, many correspondence audits can be resolved with relatively minor adjustments. In others, an adjustment may be warranted but can be easily and objectively accepted with a proper explanation of the law. In many cases, Crepeau Mourges can quickly and cost-effectively represent taxpayers faced with a correspondence audit.
A second type of exams conducted by the Internal Revenue Service is a “desk audit,” sometimes called an “office audit.” Many self-employed taxpayers filing a tax return with a Schedule C are selected for this type of audit. In these audits, a taxpayer will receive a letter with a pre-determined date requesting the taxpayer to appear in an office of the Internal Revenue Service with specific substantiating documents and information to support their tax return. A tax examiner will interview the taxpayer and review the substantiation. These meetings can last anywhere from one hour to an entire day.
At a minimum, if you are selected for a desk audit, it is recommended that you consult a tax professional before appearing before the Internal Revenue Service. In these consultations, you can discuss the potential issues involved in the audit, the documentation that will likely be needed to support the tax return, and what to expect during the process. In the alternative, a taxpayer may retain tax counsel to handle the exam on their behalf. While more expensive, the latter option is typically warranted for those tax returns with limited substantiation, incorrect positions, and/or where a nervous taxpayer is involved. Crepeau Mourges frequently handles and advises taxpayer or their tax preparers with respect to desk audits.
The final category of examination conducted by the Internal Revenue Service is the “field audit.” Unlike the prior types of audits, these engagements are very involved, can take months or years, and can require taxpayers to produce large volumes of personal and financial information. These examinations are serious matters typically involving complex issues and substantial potential taxes and penalties.
These in-depth audits are conducted by some of the most sophisticated revenue agents employed by the Internal Revenue Service. Many agents have advanced degrees in accounting or finance, and some have designations as Certified Public Accountants and lawyers. It is not uncommon for multiple revenue agents to be involved in these matters and, in some cases, for government attorneys to be involved.
Aside from the experience of the personnel involved, these examinations involve a much greater level of information-gathering. In most, the Internal Revenue Service requires an interview with either the individual or key personnel of the business. Most examinations also involve a tour of a taxpayer’s home and/or business. To make matters worse for taxpayers, revenue agents are well-versed in the law and common problem areas on tax returns. When taxpayers are evasive or are otherwise unable to provide a legally substantiated response to all issues, revenue agents will resolve doubt in favor of the Internal Revenue Service.
In almost all circumstances, a taxpayer should retain a competent tax attorney to handle a field audit conducted by the Internal Revenue Service. Revenue agents have been known to push, and perhaps overstep, the boundaries of taxpayer rights when dealing with unrepresented businesses and individuals. Experienced and competent tax counsel should understand these boundaries and vigorously defend those rights for a taxpayer. These actions are needed as, if left unchecked, revenue agents can, and will, turn a field audit into a tedious and invasive fishing expedition. And, as more time passes and examinations are permitted to be unnecessarily expanded, it provides additional ammunition for revenue agents to make criminal referrals, expand the audit into other years, and find inventive ways to increase proposed assessments of additional taxes and penalties. For these reasons and more, it is strongly recommended that those selected for a field examination engage an experienced and competent advocate. Crepeau Mourges routinely represents individuals and businesses in field audits and will work to achieve the best result possible in light of the gravity of the situation.