The manner in which one responds to being selected for an IRS audit can run the gamut of possible reactions, but typically the response of the average taxpayer will be one of two possible extremes. One extreme is sticking the head in the sand and completely ignoring the request or giving so little information as to be considered uncooperative. The other is to provide excessive information in order to prove how cooperative you are, including information that could lead to a further tax liability or worse. As with most situations, the middle ground might be the safest place to be.
In the middle ground, there is cooperation without oversharing. There is responsiveness, but not solicitousness. There is honesty, but not self-incrimination. If you are the subject of an IRS audit, you may want to be in that middle ground because the consequences of the two extremes may be devastating.
Failure to cooperate with the IRS in an audit matter may lead to a staggering array of penalties and if the revenue agent believes there are badges of fraud it could include a referral to a special agent of Criminal Investigation to commence an IRS criminal tax investigation. If the investigation remains civil it may lead to substantial penalties on top of what is already owed in taxes. Other consequences of the increased liability may later include garnishment for whatever is ultimately owed and the freezing of bank accounts and assets. Failing to provide complete and accurate information to the IRS in an audit can trigger a cascade of consequences. Of course, collection issues would be better dealt in a separate blog. Enough to say, owing money to the IRS is not good.
On the flip side, over- enthusiastic cooperation is equally fraught with hazards. Typically, the IRS may ask very specific questions in an audit, usually geared toward a particular area of the return or even a specific transaction. This would not be the time to offer that you are concerned about whether your deductions are legitimate or to claim that you gave an educated guess as to how much income you made from a particular side business since you didn’t bother to keep records. In other words, stick to the questions that the IRS is asking and do not look to open up a can of worms..
The consequences of over-cooperation can be as disastrous as not cooperating at all. The scope of the audit might be widened resulting in higher liability and exposure, or you may not have as advantageous of a bargaining position should it come to negotiating at a higher level within the IRS such as at an Appeal conference .
The IRS is a large and powerful agency that has the potential to make your life hard. You can unknowingly compound this potential by how you respond to the IRS’ inquiries. So, the best step that you can take when you receive that notice of audit or a letter requesting more information is to contact a skilled tax dispute attorney first. This attorney can help you understand the requests that are being made, the type of information that is being sought, and most importantly, how to respond and with what type of information. They can advise as to when certain requests are overbroad and require a more narrow and nuanced response or when disclosure may be the best road forward.
Since it is so crucial to have competent and experienced tax dispute counsel on the front end, should you receive that letter from IRS, consider making your first call to the attorneys at Weisberg Kainen Mark. They have the necessary experience dealing with the IRS to assist you and can give invaluable guidance on how and when to respond to the IRS to minimize liability while satisfying the IRS’ inquiries.