IRS Temecula Tax Audit Procedures and Appeals

Almost all tax returns including businesses today are filed electronically by e-filing. The IRS audits immediately by matching names, Social Security numbers and other data against a master list provided electronically by other agencies. A mismatch will result in a non-approval of the e-file submission. This is the first audit. When accepted, an acknowledgement is sent to the provider and the IRS computer will continue to match your return data against their giant file of 1099 and W-2 forms, balances owed from prior years, estimated payments, and other forms. A mismatch will result in another computer generated correction letter about a month after filing. This is the second brief and limited audit by computer. At this point they may have mechanically held up your refund for further review if you have an unusually large refund.

The next audit happens a year later when the IRS has matched the computer filed return data against a master file of standard data and then searching for out of place items like large losses, unreported income, and credits. This is a third computer audit. This results in a correspondence SC 2000 form asking for your review and comments. Sometimes they are wrong but mostly you are wrong. This is a serious audit and is done by mail. There is a 30-day opportunity to respond with new data showing how they are wrong or simply paying the taxes with penalties and interest for omitting income or other data. This audit is generated by computer but reviewed by office audit staff when it is returned. If ignored, you will receive a bill in the mail. At this point you should sign a form 2848 Power of Attorney if you wish for us or anyone else to represent you.

The fourth and most serious audit is generated by the DIF score. This is a numeric score compiled by matching your return data against a predetermined standard compiled by meticulous business and individual audits in past tested audit examples. Your audit letter asks for an opportunity for you to send in all the receipts for your business to an auditor [usually out of state] who will review them and match them against the returns. These audits are almost always either Schedule A itemized deductions, or B your Schedule C business. These audits are very cold and usually more productive for the auditor [who may have limited audit experience] because it is usually impossible to find all your business receipts or document your business auto mileage. Calling the auditor to dispute differences is not as successful as a face to face audit would be. A change of venue or real face to face in a local IRS office is always ignored.

Or, you could receive a letter inviting you to visit your nearest tax office to meet your auditor, usually an experienced person from the Small Business Audit Department because most audits we see are for businesses. These people are very direct and have limited time. Accordingly, they ask for copies of all your bank statements for the year [all deposits are income unless proved otherwise] and large expenses need to be proven with receipts and documents in hand.

After the Patriot Act on Terrorism during 2001 the Bank Secrecy Act was included for enforcement to assure that all checks cashed at your friendly bank or Credit Union that were for $10,000 or more were reported [Suspicious Activity Report] to the FinCEN and the IRS. I don’t know if this makes you a terrorist, drug dealer, money launderer or not but now it shows up in the auditor’s records and they will ask about it. It could also trigger the audit. At the end of the two-hour audit you will be asked to sign off on the results, or send in missing data and they will give you a letter-sized envelope addressed to them, or appeal.

If you have a corporate business the auditors may ask to visit your office and place of business. These are field auditors, the best in their trade. They are the only auditors with a four-degree in accounting and are very serious about looking at complete financial statements, matching inventory and mark-up, and looking for missing pieces on corporate 1120 tax returns. They are professional, well paid [at least more so than in the past] and working their audit experience to pass the CPA exam to become tax specialists in big firms on the other side of the fence. The last one I encountered had a PhD in law and he was tough because it was a fraud audit. We were reconstructing the Quickbook records of a new client whose personal bookkeeping left something missing in a big way. Fortunately, big audits with field auditors are very scarce. They went from common to rare when the IRS began to hire better people.

All three kinds of audits are subject to appeal. There are three kinds; first you must not be able to reach agreement with your auditor and will not sign off on the audit. Then you can appeal to his supervisor, who has already reviewed the auditor’s work. This is usually a dead-end although sometimes you have an opportunity to meet with him eye to eye in a little room with a panic button on the wall above the table. The last time I met with one of their people there, they had moved the button to below the table on the auditor’s side and repainted the wall. Sometimes they avoid the step altogether and you go to the next step by default.

The next appeal is Tax Court. Forms are filed which go to Washington D.C. They must be timely, within the usually 30 day response, as all audit appeals are, and will result in an appointment with an auditor from this Independent Agency in your local city [for me, Riverside or San Diego]. The Appeals process is a two-step process. The first is where you meet with one of the best IRS auditors and present your case and differences using the proper tax code outline. They will argue a bit, take things under consideration for another month or another meeting, and finally concede or give something to end the process. I have won all five tax court cases but I refuse all cases that are stupid, delaying, or nonmaterial. The auditors are the top of their profession and will treat you properly unless you just jumped off the train from the Moon. If you disagree with the results of the Audit Appeals then it is off to Tax Court. You need a real case for this one because an attorney EA friend quoted a $20,000 fee to handle a Tax Court appeal [client couple, a lawyer, and CPA wife, lost their Tax Court Case and came to me to appeal. I turned it over to the proper authorities. No attorney, CPA or Enrolled Agent wants to take this step without specialized training in Court procedure and more tax law.

If you lose the audit you must pay the IRS or they will attach assets and empty your paycheck and bank accounts. They rarely seize assets to sell but patiently put liens on everything until you do something with the property. They have computer lists of assets in your name [Social Security numbers] and find things quite easily. And last but not least, is that they ask how much cash you have in the safe, on hand, and in the safe deposit box.

One last note on office or field audits is that if they end up with a no-change audit they are not supposed to audit the same again. I had one case where we won the office audit [client kept great honest records] and the next year he showed up on the audit list again. The auditor refused to bow out and we went to a second audit. Naturally, it was the same client and we had another no-change audit.