IRS Law Blog

You went to the the mailbox – a day just like any other day, and there it was:  A letter from the IRS stating that your taxes have been selected for audit.

The letter provides a date for you to meet with an IRS auditor, and a laundry list of information she wants you to bring, possibly including documentation verifying your claim to deductions on your tax return.

How do IRS auditors go about their job – how do they think?

What are you in for if you go? (By the way, you do have the option of retaining a professional to go for you so you can sit it out.)

Well, IRS auditors are people, and they have a job to do.  Of course, that job is to ensure that your tax returns are accurate.

That often means precision in their job performance.

IRS auditors are generally trained to be very narrowly focused.

For example, if you have claimed a deduction for business use of your car, tax laws require you to keep a log and write down where you drove, how many miles, who you met with, and the business purpose of the meeting.  Every trip, every day. Technically, it is not enough to go back and recreate the log later; it must be written down as you do it.

That’s a heavy burden, and is often too much for a businessperson to take on in addition to all the other obligations of running a small company.  But real-life considerations unfortunately do not always enter in to the auditor’s point of view.

But let’s say you are a real estate salesperson. I mean, c’mon, right – clearly you had to drive for your business.  Open houses, meeting with clients, placing signs, neighorhood tours.  But you did not maintain the log.

What is obvious to you (you drove a lot of miles) may not be acceptable to the auditor.  The law requires a mileage log, and you do not have it.

The auditor applies the law corrrectly, but narrowly.  (Hold tight, read on, there are solutions to this; every decision of an IRS auditor comes with appeal rights.)

Also, understand that IRS auditors are really investigators.  An audit is an investigation.  That can mean an answer to one question can often lead to another question.

Here’s an true-life example of an IRS auditor’s line of questioning:  My client owned an apartment building.  He lived in one of the apartments.  A tenant moved out of a rented unit, and the client repainted the apartment to prep it for the next tenant.  An audit ensued, and the auditor requested verification of the client’s expenses in operating the building.  One deduction was for maintenance and repairs, which included painting the rented apartment.  A receipt was provided, showing the labor and materials that were paid to a painter.

Seems simple and straightforward, right?

Wrong.

The receipt was questioned by the auditor as it was not marked as showing whether the paint was for the the apartment being rented out or the apartment where my client lived.

Again, a very narrow thought-process, very technical, and somewhat jaded that my client was not to be trusted and was writing off a personal painting expense as business (although this is the auditor’s job and must be respected).

Of course, my client was not trying to push one over on the IRS, but would have had to find the painter and get a statement as to which apartment was painted to satisfy the auditor.  The client had lost touch with the painter.

To an IRS auditor, documentation is everything.  Your word is often not enough.

So now that you know what to expect from an IRS auditor, here’s the solution to challenging how IRS auditors think, act, and conduct audits:

The good news is that the IRS auditors are not the end of the line when it comes to your tax returns.  In fact, they are just the beginning.

Every decision an IRS auditor makes is subject to appeal to the IRS Office of Appeals for a meeting and hearing to review audit’s findings about you.

IRS appeals officers are usually the opposite of IRS auditors:  They are real-world based, practical, and considerate of what you have to say.

IRS appeals officers’ jobs are different from IRS auditors:  IRS auditors do the investigation; IRS appeals officers are trained to resolve and settle audit disputes.

Ultimately, you have the right to challenge an IRS audit in U.S. Tax Court, before a judge not affiliated with the IRS who will listen to your case, review your documentation, your testimony, and make an impartial decision.  For the apartment being painted, that means you can tell the judge it was not your apartment but a painter’s, and absent any IRS evidence to the contrary, the judge should believe you and allow the deduction.

An IRS appeals officer’s job is to think like the judge and do their best to replicate how a court would rule without you and the IRS having to go to trial.  That results in a more open, broad-based negotiation, where business miles driven by a realtor could be allowed because it is obvious that is occurred.  How a judge would rule is simply not on the radar of an IRS auditor.

Challenging the auditor is often a fruitless effort.  The challenge belongs in the hands of an IRS appeals officer.  When being audited, it is important to know the limitations of the auditor, and how to work around it to get the right result. Engaging an auditor does not always lead to resolution but rather to more questions. Agree to disagree, and move on to IRS appeals for reconsideration.