When the IRS and/or NYS Department of Taxation and Finance (DTF) begin an audit, it is not something to take lightly. Audits are rarely started randomly; if you are being audited, there is likely a reason. Common reasons for audits include (1) the income reported on tax returns not matching the income reported to the IRS and NYS governments, (2) the IRS and NYS computer systems picking up anomalies in returns (e.g., reporting unusually high itemized deductions, claiming unreasonably high business mileage expenses, etc.), (3) the reported gross sales on sales tax returns not matching gross sales reported on business income tax returns, (4) abusive claims for refundable tax credits such as the Earned Income Credit (EIC), (5) reverse audits (i.e., when information found in audits of one taxpayer causes an audit of another taxpayer), and (6) whistleblower audits (i.e., when someone “blows the whistle” on another taxpayer by reporting them to the IRS and/or NYS DTF).
Failure to handle an audit correctly may not only result in being taxed on the items at issue in the audit, but it can also lead to assessment of onerous penalties and interest. Even worse, it could result in criminal action being taken. While the odds of an audit going criminal increase when the audit involves trust fund taxes such as sales tax and payroll tax, in any type of audit a criminal case is possible. For this reason, and many other reasons, it is advisable that a tax resolution law firm at least be consulted before responding to an audit.
An audit can be handled by one of the following three parties: (1) by the taxpayer – rarely a good strategy, (2) by the taxpayer’s accountant – occasionally the right strategy or (3) by a tax resolution law firm – usually the right strategy. Again, it is our belief that a consultation with a tax attorney who is competent in tax resolution matters is the best way to figure out who should handle an audit before any records are released to the auditor and before any meeting with the auditor takes place. It is important to keep in mind that once “the cat is let out of the bag” it is unlikely that you will be able to put it back in. What you say during an audit is important, what information you provide in an audit is important, the presentation of the audit response is important, and the strategy and tactics used in an audit are important if one is to hope for a successful outcome.