June 17, 2015
The use or Correspondence Audits by The Internal Revenue Service has increased significantly. The primary reason is cuts congress has made to the IRS budget. It is just more efficient use of an IRS Employee’s time to review audit evidence by mail rather than having to sit with someone and take the time to listen to an argument. The former takes much less time.
A further difficulty is that if they send you an audit letter and you do not respond timely, they will assume that you have no evidence and disallow all of your expenses. Many people do not respond or even open letters from The IRS. If you don’t respond, they will send you a bill for the additional tax, interest, and penalty that is a result of the disallowed expenses. With The IRS you are guilty until proven innocent. They will disallow every expense that is a part of the portion of the return that is under examination in the absence of evidence. If you then do not pay the bill, you will face a lien and ultimately a levy.
Obviously, it is much better to respond.
Please also realize that correspondence audits are much more difficult to defend, because you cannot argue evidence with a live human being. It is all about providing the original documentation necessary to prove that a deduction was ordinary, necessary, and allowable. Our income tax code is written such that everything is income, unless the government specifically says that it is not. And nothing is deductible, unless they specifically say that it is. Your opinion on what should or shouldn’t be deductible is by definition, irrelevant. Don’t look for logic. Look for tax laws that support your claims.
So here is a step by step guide on how to handle an IRS Correspondence Audit
1 – Open your mail timely.
Most IRS Correspondence has a due date attached. If you do not respond timely, the scenario mentioned above will probably occur. In order to get it straightened out, you will then probably need to take the case into appeals. The appeals process is much more time consuming and expensive. Open you mail and respond timely.
2 – Organize the physical evidence
You will need to put together copies of cancelled checks, receipts, credit card statements, or whatever evidence you have to substantiate your claim of a deduction. It also must be organized. If you just throw everything into an envelop and expect the reviewer to organize it, you will probably be greatly disappointed with your audit results. The best way to do this is to organize the evidence by line item. Let’s say that they are questioning a deduction for un-reimbursed employee expenses that total $1,000, and that $1,000 is made up of 14 different receipts. Do a spread sheet showing the individual entries totaled at the bottom, make a copy of all fourteen of your receipts, and staple everything together into an organized package.
Do that for each and every one of the line items under review.
3 – Provide a cover letter and a copy of the original audit notice
Your cover letter should include your social security number or FEIN, the type of return under examination, and the year or years in question. It should also show an overall recap of your finding in reviewing the evidence and what you think the outcome should be.
4 – Put everything together into one package, and mail it to the address on the original audit letter by the due date.
If you make the mistake of mailing it to your local IRS Office, it will take forever to get to the correct place. In the process, it might get lost.
5 – Do not be discouraged if you don’t get everything you want on the first try.
It is common to go back and forth on a correspondence audit three or four times before everything gets ironed out. Be patient. Just because something makes sense to you, does not mean that the IRS Officer reviewing your evidence will see it the same way.
And get some representation. If you lose a correspondence audit, the IRS will probably come back the next year and audit again. Its better to take the time and do it right the first time, before an audit becomes an annual event.
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