If are audited, you have certain rights under the tax laws as a United States citizen. Don’t automatically assume you did something wrong by being audited, but do be smart about how you respond.
You are entitled to have an Enrolled Agent, CPA or another person who is “admitted to practice before the IRS” to represent you at a hearing.
You are also allowed to tape record the meeting, but you have to notify the IRS 10 days in advance of the IRS tax audit.
You have the right to appeal anything you are found to be in violation. These include anything involved with IRS tax collections, such as tax liens, tax levies and property seizures.
You can seek “hardship relief” from the IRS if a property seizure would create a significant hardship. Make sure you have the paperwork and proof to back up that claim.
The IRS can waive tax penalties if you show you acted in good faith on the incorrect advice of an IRS worker. Hey, nobody is perfect, and even IRS agents make mistakes. You shouldn’t have to pay the price for their errors, however, so make sure you keep excellent records.
You can give your Enrolled Agent (EA), CPA or attorney, a power of attorney for the IRS tax audit; therefore, you can be absent during the actual IRS tax audit, provided you don't receive a summons from the IRS. This can give your representative more time to respond to tax questions from the IRS agent because they may have to confer with you on some issues, delaying the progress of the IRS tax audit.
The best way to avoid a tax audit is to make sure file a complete and accurate tax return. Make sure you double check your math, and then have someone else check it as well.
Be sure you have used the correct IRS tax forms and the right IRS tax schedules in making calculations.
If you think there may be a question surrounding a large deduction made or tax credit you want to take, attach a letter with an explanation as to why you are making this deduction/credit and your reasoning behind it. It never hurts to be proactive.
What if I can’t pay what I owe?
So many times it becomes mathematically impossible for taxpayers to pay off the IRS. Between the initial amount owed, the penalties and interest charged against the balance that is added everyday, there is no way the balance can be zeroed out. They simply don’t have the income or the earning capability to satisfy the debt.
Don’t despair, because you can help yourself. The IRS is willing to negotiate a settlement amount and reduce the penalties and interest, or even waive them completely.
If you qualify, there is an IRS program called Offer in Compromise, which is basically an agreement you and the IRS that settles a tax liability (debt) of less than the full amount. Think of it as a fire sale without the fire.
When the IRS accepts your OIC and you pay the debt, then all federal tax liens are removed.
You cannot take this arrangement lightly. You must stay on top of things by filing and paying your tax returns for the next five consecutive years, or all bets are off. The liability will be re-evaluated, as well as all penalties and interest. Life will be so much easier for you in you stay compliant and follow through with your payment arrangement.
The IRS looks at an OIC as a last resort effort to pay the debt. If it is unlikely the funds can be collected any other way, it is a reasonable agreement that reflects a potential to collect.
After all, the goal of the IRS is get the money any way they can and which will cost the least for the government. An OIC is a legitimate alternative to declaring a case not collectable by any other method.
Be aware, however, that negotiating and preparing an accurate OIC can be quite complicated, and may take from 6 to 18 months. But once your offer has been submitted to the IRS, all collection efforts will stop. There is a $150 fee associated with filing this document, in addition to any representation fees should you hire someone to work with you.
Not every OIC will be accepted, however. The IRS can determine refusal to several requests.
A tax debt can be compromised for any one of the following reasons listed below:
If there is doubt as to the liability – is the assessed tax correct?
If there is doubt as to the collect ability – can you ever really repay the full amount of the debt as it stands now?
If there is no doubt about the assessment amount or the viable chance of collecting the full amount, but there is an exceptional circumstance which allows the IRS to consider a taxpayers OIC, it may be denied. To be accepted, the taxpayer must demonstrate that collection of the tax would cause an economic hardship or would be unfair and inequitable.
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