Tax Tips: Ouch, I just received an audit notice

Barry Dolowich for the Monterey Herald writes: Q We just received a notice from the Internal Revenue Service stating that they are auditing our 2011 income tax return, a return that we prepared using purchased software. Are there any benefits for hiring a professional to represent us or should we just handle it ourselves?

A You have my condolences. Being subjected to an IRS audit is never a pleasant experience. However, the experience is not nearly as stressful as most taxpayers believe. Generally, a disallowance of deductions by the IRS may cost you some money, but you will not be going to jail!

The IRS audit notice will usually isolate a specific area or areas of your tax return to be audited. If the issues are clearly “black and white,” it may be perfectly fine for you to represent yourself at the audit. For example, if the IRS is questioning your charitable contributions and you have all the supporting cancelled checks and receipts, you should not have a problem.

If it is in the “gray” area and technical issues then I strongly recommend professional representation during the audit. An example of a gray area issue may be in the business use of your auto or business meals and entertainment. Technical issues may include dealing with hobby loss rules, home office deduction, depreciation, etc.

Some of the advantages of using professional representation to handle your audit are as follows:

• Overall stress reduction. Allowing an experienced professional to handle and deal with the revenue agent will certainly alleviate stress. In most cases, you will never even have to speak to an agent or attend any meetings.

• Avoid “foot-in-mouth” disease. I have heard many war stories of taxpayers who could not stop talking during an audit and consequently, led an agent down a path he had no intention of traveling.

• When responding to direct questions, a taxpayer representative can use phrases like “I believe that …” or “My understanding is …” However, a taxpayer will have to generally answer “yes” or “no” to the same questions. A representative can possibly avoid or divert a sensitive issue without lying, whereas the taxpayer may be committing fraud by lying.

• Over the years, a number of agents have told me that they prefer to deal with representatives rather than the taxpayer. Dealing with a representative is much less stressful for the agent than dealing with a hysterical taxpayer.

• An experienced representative and an IRS agent generally speak the same language. Since both deal with the technical aspects of taxation on a daily basis, it is much easier for a positive rapport to be established quickly.

• Often times, the audit boils down to a negotiating process. An experienced representative is usually skilled in the art of negotiation.

You may be represented by a certified public accountant, attorney, enrolled agent or any person permitted to practice before the IRS.