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Mar 11 Attorney Articles

Handing Off Your IRS Audit

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You’ve been making a lot of money and now you’ve been notified you’re being audited by the IRS. It’s too late to worry about an aggressive position you took on your return or the tax shelter partnerships you invested in. Even worse, you ignored your CPA’s warning that the newest IRS audit initiative focuses on auditing more high-income returns and large partnerships.

You’re smart enough to realize you shouldn’t handle this on your own. Among other risks, the hazard of having to handle questions you didn’t anticipate or the possibility of an overly zealous or oppressive revenue agent trying to bully you is unappealing. You’ve heard that many agents think the world is divided into two groups: the tax cheats they’ve caught and the tax cheats they haven’t caught. Finally, despite your own skills, you know that having an experienced tax practitioner who knows the law and how to deal with the IRS will certainly help. But how should you determine the best person to represent you?

First, consider your tax preparer; after all, he or she is already familiar with you and your returns, so you can save the time and expense of bringing someone else up to speed. He or she may even have had some hand-to-hand combat experience with revenue agents. However, many tax preparers, while great at preparing returns and providing information, are not nearly as skilled at protecting their clients. A representative who volunteers harmful information before thinking through a client’s overall strategy may irreparably harm that client. Moreover, if your preparer thinks you did not inform him or her adequately about the issues under audit, you may risk your preparer defending his or her own innocence – rather than yours – when pressed by the taxing authorities. Such discussions are awkward at best, and can be even worse given a tax preparer’s limited ability to rely on attorney-client privilege. Fortunately, the best accountants will know from experience when a tax attorney should be retained to aid in the client’s defense. Even better, the attorney can often hire the accountant to assist in the audit under the Kovel rule, allowing future disclosures to the accountant to be protected under the attorney-client privilege as if made directly to the lawyer.

If you’ve decided to hire a tax controversy attorney, ask your tax preparer and/or your business or personal lawyer for recommendations. They’re the people most likely to know experienced tax controversy lawyers in your community. Once that’s done, take the time to interview one or more candidates, making sure you and the lawyer are compatible. After all, it’s a relationship that’s important and which may have to last for several months or longer. Also, don’t be surprised if the lawyer recommends speaking with you and your tax preparer at length before meeting with the agent. You want someone who’s well-prepared and knows where problem issues may be lurking, even if they’re not on the agent’s initial list of areas of inquiry. Such issues may involve not only traditional issues such as unreported income, unsupported deductions, and hobby losses, but also newer issues like virtual currency transactions, foreign accounts, and information returns. A lawyer prepared to deal with such issues is far more preferable to someone who merely plans to play defense or subscribes to the “ready, shoot, aim” method. A good lawyer may even suggest you filing qualified amended returns for years not yet under audit to prevent further imposition of penalties.

Finally, don’t assume that the IRS agent will think you’ve got something to hide just because you’ve hired counsel. Unlike TV dramas where detectives browbeat criminal suspects into believing they’ll get a better deal if they confess before consulting counsel, revenue agents are trained to deal with taxpayers’ representatives and will do so without prejudging the outcome. Best of all, a skilled representative can avoid or minimize your having to meet with the agent yourself.