Fatal Mistake #1 – Failure to limit the scope of issues under the audit. When the IRS notifies you of an audit of your return, it is most often being requested for purposes of examining certain discrete tax issues presented on your return. A taxpayer can undermine his or her position by failing to limit the audit to only those issues. You should avoid letting the IRS auditor to go on a hunt in search of additional taxes from you.
Fatal Mistake #2 – Thinking the IRS agent is your friend. The IRS agent may be a very nice and likeable person. However, it is the IRS agent’s job to represent the IRS, not you. Any communications you make can be used against you in the audit, on appeal, or in a court of law.
Fatal Mistake #3 – Letting the IRS Agent review your entire file. Many honest taxpayers believe that because they never intended to evade any taxes, they can simply give all of their tax workpapers to the auditor. This can be a huge mistake. If the auditor has your entire file, the auditor is allowed to hunt for additional taxes from you. Instead, you or your tax advisor should only give the agent those records that are relevant to the issues under audit by the IRS.
Fatal Mistake #4 – Assuming the IRS agent’s audit conclusions are correct. Unfortunately, many taxpayers conclude that the auditor’s adjustments are gospel. However, the IRS auditor is often incorrect. This can arise from an incorrect understanding of the law or facts surrounding your case. For example, since it is your burden to prove deductions, the auditor will deny you any deductions unless you prove them. But your burden is not so overwhelming that deductions based on lost records cannot be proved with such evidence as oral testimony, affidavits, or reconstructed records which may not have been presented to the IRS agent.
Fatal Mistake #5 – Failure to Assert your right to an audit which is at a time and place convenient for you. Although the IRS has the right to audit you, you may have the right to have the audit done at a time and place that is convenient for you. Some audits can even be done by mail. You should take appropriate time to prepare for the audit, and become aware of all of the issues that the IRS agent will examine in the audit.
Fatal Mistake #6 – Failure to Record the Audit conference. You have the right to record any audit conference, as long as the IRS is also allowed to record the conference. By recording the audit conference, you can prevent the auditor from changing the ground rules of the audit.
Fatal Mistake #7 – Making a statement that you are not 100% sure about. If you are asked a question by the auditor, and you are not certain of the answer, do not be shy to state that you are not sure, and that you will get back to the auditor on that issue. You can’t always take back a statement that has already been made, even one that may not be entirely correct.
Fatal Mistake #8 – Lack of respect shown to the IRS agent. Believe it or not, some taxpayers fail to treat the IRS agent with respect. Remember that although the agent is technically your adversary, he or she is just doing their job; they deserve respect. They sometimes have a difficult job. You may compound any problems that you have by making an adversary into an enemy. As my father always said: “You catch more flies with honey than with vinegar.”
Fatal Mistake #9 – Failure to call the IRS agent’s bluffs. Although you are not allowed to cheat on your taxes, this is still America, and you have as many or more rights than the IRS agent. Don’t be afraid to respectfully challenge the agent as to a particular issue, or appeal the decision. The IRS has an Office of Appeals and a Taxpayer Advocate Service which is meant to give taxpayers some redress in those situations where auditors incorrectly assess additional taxes.
Fatal Mistake #10 – Signing a form you don’t understand. If you sign certain IRS forms, your signature can act as a waiver of your rights. These can range from extending the statute of limitations on assessment of taxes, the statute of limitations on the collection of taxes, and/or a waiver of one or more of your many rights to appeal. If an agent presents you with one of these forms, you should consult with a CPA or tax attorney to avoid waiving your valuable rights.
Fatal Mistake #11 – Failure to recognize a criminal investigation in progress. If a person from the U.S. Department of Justice appears wearing a firearm, you know that you are being investigated in a criminal tax matter. You should act accordingly; maintain your right to remain silent, say absolutely nothing of substance regarding your taxes or your assets to the official, and contact an attorney immediately.
Fatal Mistake #12 – Failure of not being represented by tax counsel. You should strongly consider retaining tax counsel for the audit; one who is a CPA or attorney familiar with tax issues and audits. Often the tax professional can much more quickly recognize what issues the auditor is exploring, more effectively limit the scope of the audit, and more effectively counter any arguments made by the auditor. The third-party professional can also much more plausibly give the auditor an answer of “I am not sure; can I get back to you on that issue.” This will permit you to and the professional to address the issues at a more convenient manner, and in such a way as to avoid being put on the spot during the audit.