Tax Examinations

Also referred to as audits, this is where you get the dreaded letter from the IRS (or possibly from a state government) advising you that you are/your business is, being audited. Typically, the audit notice is for only one year, but it can be for a few years – whatever is open under the prevailing statute of limitations (which is generally 3 years - but with many exceptions). 

The exam can be very broad based, covering everything on your tax return or in your business, even delving into your bank accounts. It could also be more limited – for instance only challenging your charitable contributions or perhaps travel and entertainment expenses of the business. 

A bit of advice – if you get one of these letters, don’t ignore it. A lot of troubles come about when people simply ignore correspondence/notices from the IRS. Either tend to it or have somebody such as your CPA address it on your behalf. As far as a tax exam, you always have the choice of either handling it yourself or having your CPA (tax preparer?) handle it for you. While this comes from a point of view of a bias, I strongly urge that (in other than the simplest situations – and even then, who knows) you should never represent yourself before the IRS. A CPA who is familiar and expert in taxes and familiar with IRS procedures, knows far better than you how to handle the tax exam. There are issues of what to say and what not to say, and these issues typically have nothing to do with being honest or not – simply a matter of understanding the rules. 

Also, sometimes when the IRS agent asks a question or requests a certain document, it might be best to be able to dodge the question to get some time to review your situation. It’s much easier for a CPA to dodge the question than for you personally. If you made a mistake and got started on the exam by yourself, and then realized that you are in over your head, it is not too late to advise the agent that you are taking a step back and engaging your CPA to handle it from here on in. Better to lose face than to lose money. 

By the way, it is not recommended that when asked a certain type of a question you respond along the lines of “I’ve always done it that way and no one’s ever objected”. To have a CPA represent you it’s a relatively simple matter of filling out a Power of Attorney – Form 2848. Note that the IRS (as well as state taxing authorities) will not deal with your CPA without having a signed POA in their possession.

Scam caution - the IRS never calls you to tell you you're being audited (and then asks for a payment - in bitcoins or gift cards).