The Internal Revenue Service (IRS) routinely performs tax audits of individual and corporate taxpayers. Though conducted yearlong, audits tend to spike during the months following tax season, when problematic tax returns come under the Service’s microscope. Regardless of when an audit or “examination” commences, an IRS auditor will be assigned to the case. Throughout the audit process, this designated auditor will handle correspondence with the taxpayer (or, if the taxpayer has appointed a personal representative, his or her tax audit attorney). While auditors are trained inefficiency, they are also trained to be thorough – and depending on the complexity and structure of the company or individual’s specific tax situation, the audit process often takes more time to complete than the average taxpayer might estimate. This can be very disconcerting to taxpayers that are facing an eggshell audit scenario where the goal is to get the audit closed as soon as possible to mitigate any criminal tax exposure that underlies an audit.
Before our IRS tax attorneys begin, it’s important to draw a distinction between the timeline for an audit and the statute of limitations for an audit. The latter can impact the former, but they are separate issues. The timeline for an audit is how long the auditing process itself will take. By comparison, the statute of limitations determines how far back into the taxpayer’s records the auditor may probe. Depending on the situation, the statute of limitations may allow the auditor to review tax returns and related records from up to three years ago, from up to six years ago, or from any point in the taxpayer’s history – even a tax return that is 15 or 20 years old. For more information about this subject, our IRS tax audit lawyers would encourage readers to explore the following articles:
While the statute of limitations on a tax audit generally ranges from three to six years (in cases where a limit exists), that does not mean a tax audit will require three to six years for the auditor to complete. As we will discuss momentarily, most audits conclude far sooner. However, as noted above, the statute of limitations can impact the timeline of an audit by creating boundaries for the examination of aging records.
Assuming the three-year statute of limitations applies – which, to reiterate, would not be the case if the audit involved egregious issues, such as a substantial understatement of the taxpayer’s income or evidence of tax fraud– the IRS has 36 months from the date of filing to examine the relevant tax return. However, eight of those months must be allotted for the processing of any appeals, meaning protests that are filed by the taxpayer. (Not everyone who is audited chooses to protest an IRS audit decision, or litigate if the matter is not solved in appeals, but taxpayers generally have the right to these options should questionable audit return findings arise because of differences in opinion on the facts or law underlying the audit.) With these eight months accounted for, the IRS has 28 remaining months – two years and four months – in which to perform the audit. Again, these limits would be extended if the IRS suspected serious violations or criminal activity, or if the taxpayer voluntarily allowed the IRS to extend the statute of limitations which should not be agreed to without the advice of qualified counsel.
The aforementioned does not mean the audit itself will take 28 months to complete – but it does create a framework the auditor must stay within. Most audits conclude within several months to about one year, but the precise duration of an audit depends heavily on three interrelated factors: (1) what type of audit is being conducted, and (2) the number and severity of the issues detected and the changes proposed (3) the efficiency and competence of the auditor and their manager. Needless to say, an audit which reveals a complex web of tax evasion will require more time for completion (and will invariably be accompanied by taxpayer fear and anxiety of subsequent or simultaneous IRS criminal investigation) than an audit which reveals a basic accounting error, or which turns on missing receipts & documents.
While correspondence audits typically involve less serious taxpayer errors and thus ordinarily present the lowest potential for serious civil and criminal tax penalties, they can take months to complete while the taxpayer and IRS exchange documents and requests to produce documents, depending upon how rapidly the taxpayer responds. Unfortunately, the correspondence audit process can be needlessly dragged out by the IRS’s use of automation and call centers, which can create confusion if multiple representatives end up assisting the same taxpayer. Unfortunately, the IRS eventually will close an unagreed correspondence audit via a 90-day letter which will force the taxpayer into either taking on the expense of litigation or allowing the assessment to take place uncontested. A good tax litigation attorney can help you weigh the pros and cons of this decision.
By comparison, an office audit is considered to be a more intensive taxpayer examination – yet may wrap up in as little as a single day, unless the auditor asks the taxpayer to produce additional documentation, in which case more time will be allotted. Field audits, which are only conducted in cases where substantial errors or willful noncompliance have been detected, typically take longer than correspondence or office audits: approximately one year, give or take several months and often involve an interview of the taxpayer and a tour of the business under audit. The duration of any audit, regardless of type, can be extended by the following issues:
Ordinarily, the IRS notifies taxpayers of an impending audit through official U.S. postal mail. Any other type of notification is most likely a scam, although I have known IRS agents to start an audit with a blind phone call. The IRS reviews by computer and flags the majority of tax returns for an audit within two years of receiving the return. Occasionally, audit notifications do take longer, but the majority will occur within two years of when you filed.
Once the IRS sends written notification of the audit, the next step is either an initial document request in a correspondence audit, or an initial meeting at your home or office in a field audit or at an IRS office in an office audit.
The IRS ordinarily uses a correspondence audit to obtain further information or to clarify certain specific information on the return at issue. However the scope of the audit in additional tax years coming under audit or an expansion of audit scope to other areas of the return can often occur. Depending on the complexity of the requested information, and or your ability to substantiate the issues raised, you may want a Tax Attorney to help you with this process.
The IRS will quite often seem to ignore or misinterpret the information you supply and the correspondence you send. Quite often this type of audit will result in several seemingly misunderstood and even ignored correspondences and significant taxpayer stress and frustration especially where large dollar amounts are at issue.
Ultimately these audits often end up with the IRS ultimately sending you a 90-day letter in which you have 90 days to file a tax court petition or the IRS’s proposed assessment will become legally collectible even if based on incorrect fact or law and even where patently unfair to the taxpayer. Our Office can help you assess if it makes economic sense to file a tax court petition and give you a good assessment on your odds of success based on your case’s specific facts and circumstances.
For a face-to-face audit, you should not agree to meet the IRS agents at your home or business or in their office if you will have any difficulty whatsoever defending the challenged return. 70% of communication is non-verbal and you will undoubtedly be very nervous. The auditor will be closely monitoring your body language looking for any signs that you are lying to them or intentionally misleading them.
The IRS is always looking for evidence that indicates they are dealing with a falsified tax return. It is important to note that lying to a federal agent is a felony in and of itself. Hiring a Tax Attorney to ensure your audit is only about money and not about criminal tax liability is an extremely good idea. Moreover, the original preparer of your return is often the worst choice to represent you in defending a return where you knowingly cheated. They will be more interested in protecting their own credibility and making sure they are not criminally charged than in defending you.
The IRS will often set unreasonably short deadlines for completing various steps throughout the audit process that the unrepresented taxpayer will most likely be very irritated with. An attorney will ordinarily be successful in getting the necessary extensions of time to effectively deal with the audit. Ordinarily, it is best for the taxpayer to not attend an office or field audit and let their tax attorney deal with it.
Having an attorney involved at the audit level is ordinarily much preferable to only hiring one if the audit needs to be appealed because the attorney, unlike all other tax professionals, is trained in the art of persuasion and has a superior command of the facts and law at issue in your audit. Only an attorney can tell an auditor, if you take the action you are contemplating, I will see you in tax court and actually mean it. Believe me, there is power in that phrase. A dually qualified attorney and CPA is by far the most powerful set of credentials to deal with audits. Add to that a Master’s Degree in Taxation and you absolutely could not hire a more qualified professional. Hire David W. Klasing and you could not find a better track record of success. Don’t take our word for it – visit our testimonials and see what our client’s have to say about us! Also consider David W. Klasing’s A+ BBB rating and perfect 10 AVVO rating.
If during an audit, an auditor becomes aware of badges of fraud, which are factors that the IRS has come to associate with fraudulent tax filings, the auditor may request to be secretly assisted by an IRS fraud technical advisor (FTA). The FTA will weigh any observed badges of fraud and decide if the audit should be stopped and the matter referred over to the criminal investigation unit for a closer look or not. If, for example, your reported income sees a sudden and unexplained drop in a single year, and an undisclosed domestic or foreign bank account is discovered that contains unreported deposits, this would trigger further scrutiny. If an agent comes across information that you have undisclosed foreign bank accounts required to be reported on an FBAR, coupled with income tax evasion related to the offshore account, the matter is likely to be referred for potential criminal tax investigation and prosecution.
Investigations are also more common in cash-intensive industries like restaurant, bar, and hospitality businesses. Of course, failing to file your tax returns at all is also highly likely to attract negative attention toward you. In terms of criminal tax investigations specifically, being involved in any of the IRS’s dirty dozen tax fraud schemes or using something like a micro-captive insurance company to avoid paying what you owe are highly likely to get an FTA’s attention and move things from a civil to a criminal level. There are also certain situations where information is shared with the IRS by other agencies or another investigation within the agency that can prompt an agent to open an eggshell audit or criminal tax investigation into your behavior.
For example, if the IRS raids a check cashing business and finds large amounts of checks written to you personally or to your business, they will likely audit you to look for unreported income. Another example would be undisclosed cryptocurrency information that the IRS obtains because of an unrelated case against Coinbase or other cryptocurrency trading hubs. If there is at least $10,000 of unreported income that shows up in an audit, the auditing IRS agent will almost certainly consult with an FTA, who will analyze the badges of fraud in your audit for potential development by the criminal investigation unit.
You should never go through any type of eggshell audit or criminal tax investigation without the assistance and expertise of an experienced criminal tax defense attorney like those at The Law Offices of David W. Klasing. However, once there has been some sort of indication that the matter has been or may be referred to the CI unit, it is even more important that you have an attorney who knows how to protect your rights and interests during the investigation. If the CI unit chooses to develop your matter for prosecution, they have a 90% conviction rate. If you reach out to us before criminal charges are filed, we may be able to reach out to the eggshell auditor, CI agent and any U.S. Attorney assigned to your case and negotiate some sort of deal for you to resolve the outstanding matters in exchange for, at best, no criminal charges being filed, to at worst, reduced or minimized criminal charges being filed. Of course, even if criminal tax charges have already been filed, we can work to minimize the severity of the punishment related to the criminal tax charges in addition to minimizing fines, interest, restitution, and other potential conditions like supervised release.
It is not in your best interests to undergo an audit without the benefit of robust and aggressive audit representation. Without an experienced tax attorney or better yet, a dually licensed Attorney-CPA at your side, you are at heightened risk of receiving costly assessments of additional tax, penalties and interest, accidentally criminally incriminating yourself, missing steps and deadlines that are necessary for a successful appeal, and making other preventable errors that at a minimum could bring you financial or legal harm, and in worst case scenarios lead to criminal tax prosecution, conviction and loss of professional licensure.
If you, your spouse, or your small business has been selected for IRS audit, get trustworthy help from an award-winning dually licensed Attorney and CPA with 26 years’ of tax audit, appeal and litigation experience and a Master’s Degree in Taxation. For a reduced-rate consultation concerning an IRS audit, including an FBAR audit or foreign account audit, an audit of a cash-based business, a dentist tax audit, or a veterinary tax audit, contact the Tax Law Office of David W. Klasing online, or call us at (800) 681-1295 today.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing we now have offices in San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento. You can find information on all of our offices here.
Helpful Audit, Appeals and Litigation Q and A Libraries:
How do you survive an audit where you cheated? https://youtu.be/FZce4jqQJpI
How should tax audits be handled by Criminal Tax Counsel? https://youtu.be/0kt7eEp3g1c
When should you ditch the original preparer? https://youtu.be/0kt7eEp3g1c
Why should I hire the Tax Law Offices of David W. Klasing to handle my appeal? https://youtu.be/qqDQgXRmYu0
How do I know when I should file an appeal? https://klasing-associates.com/question/know-sure-im-ready-request-appeals-conference/
What are the basics of Federal tax litigation? https://youtu.be/FgxeoucqM7g