Going through a tax audit is a fear for most taxpayers — especially business owners. The process involves the Internal Revenue Service (IRS) or state taxing authority figuratively and literally digging through your income tax returns and IRS documents to look for reasons to assess more taxes, thereby interrupting filers’ lives and business operations and making everyone miserable.
Audit defense services exist to give you peace of mind, and those who use them often save time, money, headaches, and themselves from having to deal with IRS agents. The following guide will provide more information about the audit process, tax audit defense services, and why your business may want to invest in them.
Protect Yourself From The IRS
While the idea of an audit can be intimidating, remember that you have the right to professional representation. Engaging an experienced tax defense team can make all the difference when facing the IRS. In the most extreme cases, penalties from audit errors can result in hefty fines or even jail time, making professional assistance crucial.
What Is Tax Audit Defense?
Tax professionals, online preparation services, and tax prep software providers typically offer tax audit defense services, which is like insurance for filing your tax return. You pay additional fees for audit defense protection, just like you pay premiums for homeowners’ insurance to protect your house if it suffers major damage from some event.
The audit defense service add-on promises to help you if you face an IRS or state audit of tax returns you filed with the professional, website, or software provider, though the exact type of support and actions each provider takes during the audit process varies.
Examples of some services that might be a part of audit defense include:
Your chances of getting audited by the IRS are relatively low. Historically, less than 1 percent of all tax returns get audited by the IRS, but the rate increases with income.
For example, the IRS audited more than 6 percent of all 2017 returns with adjusted gross incomes greater than $10 million and only about 0.7 percent of returns that had adjusted gross incomes below $25,000 for the tax year.
Income is not the only factor however, and understanding what goes into a tax audit can help you decide if audit defense protection might be a good idea for your situation.
5 Tax Audit Defense Options
|1. Tax Software Add-Ons||Some tax preparation software, like TurboTax and TaxACT, offer add-on audit defense services. These typically cost an additional fee and provide representation in case of an IRS audit.|
|2. Prepaid Audit Defense||Companies like Silver Tax Group offer prepaid audit defense services. For a one-time annual fee, they provide professional representation if you’re audited.|
|3. Professional Tax Services||Many certified public accountants (CPAs) and tax attorneys offer audit defense as part of their services. This typically involves an hourly rate and can range widely depending on the complexity of the case.|
|4. Tax Resolution Firms||Firms like Silver Tax Group specialize in complex tax situations, including audits. They handle everything from communication with the IRS to negotiating settlements.|
|5. Insurance Policies||Some insurance companies offer tax audit insurance as part of business or professional liability policies. This can cover the costs of professional representation during an audit.|
Average Tax Audit Defense Costs
Here’s a table detailing the average costs of IRS Tax Audit Defense Services:
|Cross Law Group||Simple Audits: $2,000 to $3,000+||4.9|
|TaxAudit.com||Audit Defense Membership: $49.99+ per tax year||4.8|
|Brotman Law||Tax audit representation: Between $3,500 and $10,000+ per tax year||4.5|
|TurboTax (MAX)||Audit Defense Product: $494+||4.5|
|Silver Tax Group||Expert Audit Defense: Starts from $699+||5|
|Franskoviak CPA||Audit Defense: $3,500 to $10,000+||4.8|
Please note these costs can vary depending on the complexity of the case and specific details of the audit.
How an IRS Tax Audit Works
The IRS approaches audits in a few different ways, but, any should take correspondence you receive from it seriously. Here is a broad overview of how each main type of audit works.
The least intrusive tax audit is simply a letter from the IRS. The audit notice usually requests supporting documentation for a deduction, credit, or another aspect of your return. Once you mail in the requested documentation, it’s likely your issue will be resolved.
If you do not have the requested proof, you can choose to pay the difference and close your case or fight the issue with the IRS. It’s imperative that you take action when you receive the first notice so you don’t incur penalties.
IRS Office Audit
An office audit happens when the IRS wants to speak with you directly concerning your tax return. The IRS will request you visit one of its offices for an interview with an audit representative. This is a more serious matter than a letter and should be viewed as a complete audit.
The IRS schedules an appointment on a specific date and time and a specific office. You must attend the meeting, but you can also bring a tax professional or legal representation.
IRS Field Audit
Field audits are serious like office audits, but your friendly, neighborhood IRS agent comes to your home, business, or accountant’s office. These audits are general audits that are not limited to specific line items on your returns. Instead, the agent goes through ALL of your tax return information.
The IRS does do field audits on individuals, but businesses must undergo field audits more often.
Under an IRS Tax Audit?
The IRS Provides 3 Categories for Guidance:
- IRS regulations which are generally binding. Even reliance upon temporary regulations will not result in assessing penalties.
- The IRS publishes a number of sources known as “official guidance.” This includes Revenue Rulings, Revenue Procedures and a variety of announcements and notices included in bulletins. In theory, taxpayers cannot be assessed penalties and taxes for following this official guidance.
- The IRS publishes its “unofficial guidance.” Unofficial guidance can include website articles, press releases, various forms, tax instructions and its FAQs. Though the IRS publishes this information, it also maintains that taxpayers cannot rely upon it. If a taxpayer relies upon this information and later finds out it is wrong, they will still face penalties.
Guidance changes over time
Lawyers that are trained and seasoned can make your tax process a breeze, and can defend and represent you during an audit.
Benefits of a Tax Defense Attorney on Your Side
Tax Attorneys Have a Better Handle on the Auditing Process
Just 1 in 60 people are audited each year. Since this is such a paltry number, it’s hard to nail down a rhyme or reason for when and why people get audited.
You need to bring in a lawyer to help you, since they have a much better handle on and understanding of audits.
There are many terminologies that come with the territory that you might get bogged down with and lost. They can also take the temperature of the situation, so to speak, to assess what the Internal Revenue Service is assuming about your taxes.
This part is important, since they won’t be forthcoming during the investigation until they’re ready to present their findings. Your lawyer can analyze how deep they’re looking into your taxes to let you know whether the IRS thinks it’s a criminal situation or an oversight.
Having this preemptive knowledge will be valuable in crafting a defense against the audit.
2. You Could Be Subject to Penalties, Fines and Tax Fraud Charges
Because tax evasion and tax avoidance are very real issues, you need to be certain you are getting all the legal help you need.
An audit could be about clearing up a mistake, and you could get a small fine, or the IRS could hit you with expensive penalties and worse — criminal charges.
With so much on the line, it’s only right that you have a lawyer familiar with what entails tax evasion and tax avoidance, so you can present evidence to the contrary.
People that evade taxes account for more than $130 billion in unpaid taxes, so expect the IRS to be aggressive on these sorts of matters.
Do you know how the IRS defines tax fraud vs. negligence? Read more here.
3. There Are Different Types of Audits
Besides terminology and legalese, there are also different audits.
Some examples include a correspondence audit, an office audit, and field audit. These audits all have their differences, and your attorney can help differentiate them and assist you with whichever type you are subject to.
With a correspondence audit, the IRS will send you letters in the mail detailing mistakes, usually minor, that need to be corrected. You can take this correspondence to your lawyer, so that the two of you can decide if mistakes were actually made.
From there, they can be corrected, and your lawyer will help you send correspondence to the IRS.
An office audit requires you to come into a local IRS branch to go over records and correct or explain discrepancies. This audit is a lot more complex and involved, and you will definitely need the help of an attorney.
You will generally be given an appointment for this office audit, and an agent that is assigned to your case.
With a field audit, the IRS will come out to your home or office. You’re able to request an office appointment instead, but this might prompt the IRS to think you’re being elusive, so consult an attorney for advice on this.
4. Getting Tax Audit Help Cuts Out Mistakes
The last thing you’d want to do is have your taxes investigated for mistakes, only to then also make mistakes on your audit defense.
When you have the help of a lawyer, they’ll be able to reduce the mistakes you make, so that your audit defense is ironclad. This expedites the audit process and helps to make sure you get success and results.
5. You Will Have More Negotiating Power
Tax attorneys are also great negotiators, which can get you the best-case scenario for your tax audit.
Having a lawyer can help you negotiate the ideal payment plan or other form of settlement. These lawyers will help you get organized and send documents to the IRS as requested.
When the IRS requests proof and documentation, it’s important that you send only exactly what they are asking for, and nothing more. Your lawyer will help be the go-between in this process, so you can protect yourself and negotiate accordingly.
Also, if the IRS moves forward with criminal charges, your attorney can then represent you in that regard. Since you gave them a head start in understanding your situation by helping you with the audit, they will also be better able to defend you against criminal charges.
Therefore, it’s so important to do your research and find the absolute most dependable tax attorney that you can find.
Why Businesses Need Tax Audit Defense
A tax audit costs businesses time and money and involves mountains of paperwork. In the event of an audit, you can expect the process to take from a few months up to two years. The law provides auditors up to three years to perform your tax audit and assess additional taxes.
It’s important to note that tax audits typically do not turn out in your favor. You might provide all the documentation and tax forms requested, and the auditor might not assess more taxes, but it’s highly unlikely he or she will increase your tax refund or decrease your tax debt.
Additionally, if you are not happy with your audit results, you must wait 30 days before you can appeal the auditor’s decision. You will need to file a request under the Freedom of Information Act to receive the auditor’s records so you know the information that is on file, then sift through that information to determine where the issues reside.
Having tax audit defense helps you save time and money by letting professionals deal with the audit process. Audit representation also increases the likelihood that you do not need to spend the extra time for an appeal.
Benefits of Having Audit Defense Services
Accountant – Client Privilege Doesn’t Exist
Tax attorneys and accountants aren’t the same things, and a key difference outside of legal knowledge is client privilege. It does not exist in a criminal matter with accountants.
It presents a conflict of interest at audit time.
A Case of Privilege Lost
The Supreme Court has long-held that accountants do not have attorney-client privilege in a criminal matter, but tax attorneys do. The Internal Revenue Code 7525 of 1998 holds an “accountant privilege,” but that privilege disappears during a criminal matter.
An accountant may feel free to hand over whatever they want on your file to the IRS to save themselves. Your tax attorney may not want them to do that. Be careful what you say to your accountant.
You Can Accidentally Say Too Much
When you are facing a tax return audit, your first defense will be to get defensive. You may reply right away to an email or submit something that maybe you don’t need to submit. You want to clear your name right away, but this could lead to more problems down the road. Tax attorneys know your rights, and what you should and shouldn’t say or submit to the IRS. Avoid the problem of saying too much inadvertently by calling a tax attorney as soon as an audit comes to the table. Do not destroy or submit anything you aren’t sure of until you contact an attorney. Take note of these 11 red flags that may spark a tax return audit, or get you in trouble when you are defending yourself during one.
You Don’t Know Your Rights
What These Taxpayer Rights Include
You May Miss or Forget Deadlines
Considering a Tax Defense Service? Reach out today for a free consultation.