If you’ve recently received a notice from the IRS that you are under audit, it’s understandable that you may feel anxious about the process. IRS audits can be a time-consuming process that may need to be resolved in tax court if you have significant tax debt on your latest income tax return. Fortunately, audit defense services and audit lawyers can help you through the audit process.
How Far Back Can the IRS Audit You?
The IRS will usually only look at your tax returns for the last three to six years when you are being audited. Your federal and state tax returns will be examined for any signs of civil or criminal fraud related to your income, deductions, and other expenses. The IRS will generally not look at tax returns older than six years unless you are under criminal investigation.
Can Your State Audit You?
In states that require a separate income tax return to be filed each year, the state income tax agency can order an audit to examine or investigate items on the return. Not all states will require income tax returns, especially for taxpayers who do not own property or who do not earn enough income. Owing taxes to the IRS or state government results in the same audit procedure.
Do You Need a Lawyer for an IRS Tax Audit?
Much of the time, the best tax professional to hire when you are being audited is a Seattle tax attorney. An IRS tax audit lawyer can help you with the entire audit process, including providing tax audit representation if your case goes to federal or state court. A lawyer will keep your best interests in mind and give you advice about how to resolve your audit quickly while minimizing financial impacts.
Understand Your Taxpayer Rights and Tax Laws
As a taxpayer, you are entitled to protections under the Taxpayer Bill of Rights. Your rights as a taxpayer include a right to legal or tax defense representation, a right to request a suspension of an audit interview, and a right to know why the IRS is requesting specific documents during your audit. All of these rights will protect your interests during your audit.
A lawyer can also help you understand the specific tax laws that may apply to your situation. These laws can include limitations on the documents the IRS is allowed to request during the audit procedure, prohibitions on private attorney general actions, and much more.
Collect and Reconstruct Documents
A lawyer can also help you collect financial documents for your audit, such as your state tax return, federal tax return, and even banking documents. Other documents that may be requested during the audit include canceled checks, documents about foreign income, documents proving the validity of business deductions, and more.
While you should always keep financial documents for at least seven years, some taxpayers may throw out old documents. In this case, your tax lawyer may be able to help you reconstruct the documents you need for your audit defense.
Legal Representation and Audit Defense Strategy
If your IRS audit goes to court, you may need legal audit representation. A lawyer can help you create an effective audit defense strategy and help you communicate with the agency issuing your audit. Legal audit representation may be especially important if you have a large tax bill, excessive tax liability, or your audit is related to criminal investigations for tax fraud or evasion.
Tax Planning Advice for Tax Returns
Finally, a lawyer can also help you plan for next year’s tax return. It’s important to have a tax plan for federal and local tax so you can claim all of the deductions and exemptions that may apply to your income situation. A tax lawyer can advise you on how to file IRS income tax forms in the future to avoid a federal or state income tax audit.
Some lawyers may encourage you to hire a CPA if you are a high-income earner or if your financial situation may qualify you for certain deductions that can be confusing. If you have been audited in the past, filing your future tax returns with the help of a tax professional may be a good strategy.
Will You Need an IRS Payment Plan If You Have Been Audited?
If you have been audited, you may need to pay any back taxes you owe the federal or state income tax authority. Part of your audit defense strategy may be agreeing to pay off your tax debt with an IRS payment plan or some other financial agreement. There are several IRS payment plans you may qualify for after an audit, including:
- Full payment
- Short-term payment plan
- Long-term installment agreement
- Direct debit payment plan
Most taxpayers can qualify for IRS payment plans by providing financial information, such as a current tax return, current banking information, and current proof of income. Although the IRS has the right to deny your payment plan application if the information is inconsistent, most of the time, IRS payment plan applications are accepted quickly so that taxpayers can pay off debt without going to tax court.
Are There Other Options Other Than Installment Agreements?
If you are unable to pay off your taxes through an installment agreement without causing financial hardship, you may be eligible for other IRS settlement options. IRS or state taxes may be settled with an Offer in Compromise, Innocent Spouse Relief, or other strategies. A Seattle tax attorney can also help you apply for a Currently Not Collectible status, which can give you tax relief for a short period of time.
What Are Tax Audit Defense Services?
Audit defense means a professional tax service will help you through the audit process if a tax entity has issued an audit notification. If you use a self-filing program such as TurboTax or another tax preparation software, you may be able to sign up for an audit defense membership when you file your federal or local income tax returns.
While there may be an applicable membership fee for an audit defense service, the audit defense plan can give you an assigned audit representative to guide you through the IRS audit. As part of your membership agreement, you also agree that your audit representative will be able to prepare your audit defense for you and that you will have collection assistance for any additional tax due when your audit results are completed.
How Can a Professional Audit Defense Service Help?
An audit defense service can help you if a federal or state taxing authority is filing an audit against you. Similar to a lawyer, a professional service can help you understand your taxpayer rights and the tax codes that may apply to your tax situation. The audit defense service can also receive IRS correspondence on your behalf
The agency providing audit defense services will be able to help with the income tax return listed on the membership agreement you have with the agency. This means if your payroll tax, property tax, gross receipts tax, sales tax, city tax, estate tax, or gift tax are part of an audit, the audit defense service can help you with the tax return year identified in the IRS audit notice. For a business, audit defense services may also help with compliance audits.
What Does an Audit Defense Service Not Do?
Although audit protection services can provide significant help if you are audited by the Internal Revenue Service, there may be audit defense plan exclusions. These exclusions will not cover certain scenarios that may apply to your IRS or state audit.
One of these audit defense plan limitations includes the professional tax service not being responsible for the auditing agency issuing any notices for non-cooperation if you do not file paperwork on time.
Arbitration Provision and Other Arbitration Rules
Furthermore, if you have a disagreement with the audit defense service that helped you with your tax defense, there may be certain arbitration rules that will apply to your situation. When you sign an agreement with an IRS defense service, you will agree that the arbitration provision survives the expiration of the agreement. In signing this agreement, you also consent to AAA consumer arbitration rules related to your personal legal fees.
The Federal Arbitration Act governs how these arbitration provisions are governed, including rules such as AAA’s consumer arbitration rules and the arbitration filing fee you may need to pay if you have a dispute with your professional tax service as the party seeking arbitration. For example, these rules state that provisions are enforced by the court, not the arbitrator.
What If Your Taxes Are Being Investigated?
If your tax return is under criminal investigation and you have hired an audit defense service, it’s common for the agency to cease further audit defense services until the criminal investigation has been completed.
What Can Trigger an Income Tax Audit?
There are a few things that can trigger an IRS or state audit. An IRS audit may be ordered if the IRS or state tax agency notices any major errors or discrepancies on your tax return. An audit may also be ordered if you overpay or underpay your taxes to the IRS or state. Finally, an IRS audit may be triggered if you mix the tax return filing deadline, if you do not respond to IRS correspondence, or if you have been randomly selected for an audit.
How Common Are Audits?
While most taxpayers have a healthy respect for an IRS audit, this process is actually rarer than many would assume. In 2022, roughly 3 out of every 1,000 returns were selected for an audit, which includes people who were randomly selected for an IRS audit.
However, your income level may lower or raise your chances of being audited, and owning a business can also affect the likelihood the IRS will contact you about an audit. Some research suggests that low-income taxpayers who take the earned income tax credit are up to five times more likely to be audited by the IRS than millionaires and other high-income earners.
How Can an Audit Affect You?
If you have filed your return correctly and your previous tax debts are all paid, you shouldn’t worry too much about how an audit can affect you. You don’t need to worry about an audit impacting your credit score since the IRS does not report tax debt to any of the credit bureaus. You also won’t have to immediately worry about wage garnishment or other consequences until the audit investigation is complete.
However, if the IRS decides that there are errors on your return, the most common consequences are penalties and interest on the tax debt you owe. For taxpayers who owe a substantive debt, the penalties can cost upwards of ten thousand dollars. Some taxpayers may even be jailed because of tax evasion.
What Is the Audit Procedure?
Whether you have been randomly selected for an audit or the IRS has found a discrepancy on your latest return, the process for your audit will be the same. The first step will be a notice from the IRS or other tax entities who are auditing you. This notice will be delivered by mail.
An audit will usually be conducted via mail or sometimes with an in-person interview. Any documents you need to send to the IRS will also be sent by mail, although the IRS will accept some electronic records from tax software. When you communicate with the IRS, it’s a good idea to request certified mail so you can have delivery confirmation.
Can You Request More Time?
If your audit is conducted by mail, you will be able to request a one-time 30-day extension from the IRS so you can have time to gather and mail your documentation. If your audit is conducted in person, you can request an extension by contacting the auditor assigned to your case.
How Long Do Audits Take?
Most of the time, an audit will take about three to six months to be completed. However, if you have a very complex case, it may take the IRS or another tax entity more time to complete your audit. Additionally, if you dispute the IRS conclusion, your audit can take even longer.
Audits happen, but dealing with an audit doesn’t have to be a stressful situation. When you hire a tax professional, you can get help with your future tax returns and find an audit defense strategy that works for you. To learn more about how to deal with an Internal Revenue Service audit, get in touch with Seattle Legal Services, PLLC at 206-536-3152 today.