When faced with an IRS audit, an effective strategy can be the key to obtaining a favorable outcome for the taxpayer. Early in the audit process, the taxpayer or his or her qualified representative should consider the policy against repetitive examination, the IRS policy on reopening examinations, and the various statutes of limitations that apply to examination of the taxpayer’s records and books.
1. The IRS Policy Concerning Repetitive Examinations
An initial consideration is whether or not the taxpayer’s audit violates the IRS’s policy against repetitive examinations. The policy against repetitive examinations applies when the taxpayer has been audited in the past two years, and the audits resulted in essentially no change. If you are a taxpayer who has been audited once in the past two years and your audit resulted in little or no change, then you should raise the repetitive examinations issue with the IRS immediately upon receiving an audit letter from the IRS. In many cases, the audit can be resolved and closed at this very early stage if the requirements of the repetitive examinations policy are met. This is a very useful strategy that can be used to simplify the audit process for the taxpayer.
2. The IRS Policy Concerning Reopening Examinations
The IRS generally does not reopen closed cases. It may occur in rare cases and under very limited circumstances. If the IRS tries to reopen a closed case, the taxpayer or his or her qualified representative should ensure that the IRS is following its own procedures and regulations regarding to reopening closed IRS examinations.
3. Statutes of Limitation Applying to IRS Audits
Another factor that the taxpayer or his or her representative must consider initially when receiving an IRS audit notice is the application of various statutes of limitation governing audits. Generally, the IRS can include returns filed within the last three years in an audit. However, the IRS does have significant leeway to expand an audit to include additional tax years if the examination reveals a need to look into the taxpayer’s tax situation in previous years. At the same time, this right of the IRS to examine additional years but be tempered by an opposing requirement that the examination of the taxpayer’s tax return be reasonable. Internal Revenue Code section 7605(b) states that only one inspection shall be made of a taxpayer’s books of account for each taxable year. IRC 7605(b) also provides that no taxpayer shall be subjected to unnecessary examinations or investigations of his or her tax liability. Consideration of statutes of limitation, as well as any reasonableness arguments that can be made on the taxpayer’s behalf, are an essential component of any IRS audit strategy.
4. Formulating an Audit Strategy
If the three rules above do not apply to your case and an IRS audit is going to take place, the taxpayer and his or her representative should immediately devise a strong strategy for dealing with specifics of the examination and communicating with IRS personnel. The representative should initially evaluate the taxpayer’s situation and identify any potential weaknesses or exposure points. With regard to exposure points and weaknesses, the representative should then develop a strategy for handling those sensitive and vulnerable aspects of the client’s tax situation. From the taxpayer’s perspective, a realistic attitude and outlook must be established, including the consideration of possible settlement of the audit with the IRS at some point down the road. In serious audits, the representative and taxpayer should also discuss the possibility of tax litigation and prepare potential issues with an eye toward eventual litigation in Tax Court. Often times the best results can be achieved at the appellate level, but only if the appellate officer believes that you will go to Tax Court if necessary to achieve the best result.