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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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Tax audit problems

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.

Q: My 2003 tax return was audited by the IRS. I made just under $60k. I have my taxes done by a company called (name withheld). They told me that they would be able to have the amount of money significantly reduced if they represented me. So I signed over Power of Attorney and paid them $350. I gave them all the receipts I had and they went to meet with the IRS. I received notice from the IRS that it was reduced around $300. The original amount with penalties and interest was about $6000. (name withheld) then told me two things: 1.that the IRS person in charge of my audit was a very difficult person, and 2. the person representing me didn't negotiate correctly. So I was then told that they would file another appeal and try and negotiate with someone other than the person they said was difficult. Eventually they filed a 1040X form. Once again I received another letter saying that they would not change the amount due. The letter also said that if nothing was done they would take action to collect. When I spoke to (name withheld) they said they may need some things from me, like a letter from my employer explain reimbursement policy, but that they would let me know. Two months later I received a letter from the IRS saying that they had applied the return I was expecting from 2006 to the amount I owed. I have been trying to find out through (name withheld) what is going on but have not been able to speak to the person who is dealing with my audit, after multiple phone calls it sounds like he is avoiding me. I also came home to another letter from the Dept of Tax and Finance saying that I failed to inform them of the audit from 2003 and I have to pay them almost $3000. I am at a loss as to what to do at this point. What responsibility does (name withheld) have? This audit has been going on for over two years now. The penalties and interest have grown. It looks like they never notified Dept of Tax and Finance when they should have and now I'm in trouble with them as well. Do I need to get a lawyer? Should I pay off everything, which will deplete me of my savings? If I do will it male me look guilty and will the IRS audit other years?

A: Your question skips the most important issue. What is the underlying problem? A thorough understanding of the underlying facts and tax issues, of course, should be the basis of all of your decisions about how to handle the issue. Dealing with the IRS can certainly be difficult, but an approach based on the facts and the law will ultimately be successful. Generally you are responsible for all taxes, regardless of poor representation, even in the event of misleading or inappropriate action on the part of your accountant. You may have a separate cause of complaint against them privately, but that should not be you main concern right now. The best advice is to learn about the issues that you are facing and make a reasonable. An independent professional opinion is needed at this point. Wait until after April 15 and then find a CPA to review your return and give an opinion. If your positions are reasonable, you should persist with IRS in getting them resolved. Be careful about asking another accountant to represent you in the audit since the cot of professional representation in an audit may be more than the amount the IRS is asking from you. Discuss the details and approach to representation in advance to make sure that the cost will be controlled and justified. It is not unusual for an audit to take more than two years to be resolved so you should persist if you believe that you are correct and that the issue can be resolved through further communication. I have found most IRS auditors to be very reasonable once you provide the proper documentation to sustain your tax position. If, on the other hand, the IRS is correct in the audit positions or you are missing documentation then cut your losses and move on with your life. IRS will make reasonable accommodations for payment over time. In either event, it sounds like you need to move away from the accountant used in the past. Most people in your income bracket can handle their own tax preparation with the help of today's excellent software. Save your money for good professional advice from time to time as you may need. Finally, the wording in your question indicates that there may be two separate tax audits: a federal audit an a state audit. Find out for sure by carefully looking at the correspondence. If so, each must be handled separately.


More resources:

Battling with IRS in a tax audit