For most people, the thought of an Internal Revenue Service (IRS) or Minnesota Department of Revenue (MDR) audit can inspire fear and worry. Did you do something wrong? What happens if you made an honest mistake? Will you go to jail?
Even the most honest taxpayer will be alarmed when they receive an audit notice. Although it doesn’t occur often (in 2022, the IRS only audited approximately four out of every 1000 returns filed), it can still happen to anyone, even when they’re sure their taxes have been done correctly. The Minnesota Department of Revenue audits income and sales tax returns far more frequently.
If you’re facing an IRS or MDR audit, it’s important to understand why it may have happened, what you should do, and what your rights and responsibilities are. This blog outlines 5 things you should do if you get audited in Minnesota, which may include seeking legal representation. If the audit is complicated or charges are potentially involved, hiring an experienced Minnesota tax lawyer can significantly affect the outcome.
What Tax Returns Are Most Likely to Be Audited?
Some tax returns are more likely to be audited than others. If you are self-employed, receive a lot of your income from tips, or run a cash-intensive business, you can expect the IRS or MDR to pay closer attention. Other issues that can raise a red flag include:
- Claiming higher than average healthcare expenses, charitable contributions, and miscellaneous deductions.
- The income on your return does not match the 1099s and W-2s you received
- Your return is missing required schedules or alternative minimum tax forms
- You claimed alimony deductions, rental property loss deductions, or earned income tax credits
- There are mathematical errors on your return
- Your return was signed by a tax preparer with a history of problems
It’s important to note that being audited doesn’t mean you’re accused of a crime. A tax audit is simply a review of your return to ensure its accuracy. The IRS and MDR expects you to prove that you have accurately reported all your income and are eligible for all the credits, deductions, and exemptions you claimed.
What if I Get Audited in Minnesota? What Should I Do?
If you are selected for an IRS or MDR audit, you should take the following steps:
Step #1: Review the IRS or MDR Notice Carefully
When you are selected for an audit, the IRS or MDR usually notifies you by mail. Be sure to read the notice carefully to understand why the audit is taking place and what information the IRS or MDR needs from you.
Please note that there are three types of tax audits:
- Correspondence Audits: These audits are the least intrusive and are conducted entirely by mail. The IRS or MDR will request additional documentation or information to support specific items on your tax return. If you are unable to provide this information, the IRS or MDR may propose adjustments to your tax return.
- Office Audits: This audit is conducted in person at an IRS or MDR office or the office of a tax professional representing you. You may bring an attorney or other representative with you.
- Field Audits: This type of audit is conducted in person at your home, business, or the office of a legal or tax professional representing you. Typically, a field audit involves all aspects of your tax return and can take several months. A field audit involves reviewing your financial records, interviewing you and any witnesses, and possibly inspecting your property.
Step #2: Gather the Requested Documentation
Here are some examples of the information and documentation you may be asked to produce during an IRS or MDR audit:
- Income Documentation: All income statements, such as W-2s, 1099s, and other income statements, may be requested.
- Personal Records: You may be asked to provide personal records, such as bank statements, mortgage statements, and other financial documents, to verify information on your tax return.
- Expense Documentation: Receipts, invoices, canceled checks, and credit card statements may be required as evidence of expenses claimed on your tax return.
- Business Records: If you are self-employed or own a business, you may be asked to provide records of your business income and expenses, such as accounting ledgers, bank statements, and receipts.
- Asset Records: If you own real estate, stocks, or other investments, you may need to provide records of these assets.
- Travel and Entertainment Records: If you claimed travel or entertainment expenses on your tax return, you may be asked to provide records of these expenses, such as receipts and a written explanation of the business purpose for the expense.
Step #3: Respond Promptly
If you receive an audit notice from the IRS or MDR, you should respond as soon as possible. You should aim to reply within the specified timeframe, even if you need more time to gather the requested information. If you need more time, you can request an extension in writing, but you need to do so before the original deadline expires.
Keep in mind that the IRS or MDR has the authority to issue an administrative summons, similar to a subpoena, if you do not respond to an audit notice or fail to supply information and documents an IRS auditor has requested. Therefore, it’s important to take these notices seriously and respond in a timely and thorough manner.
Step #4: Seek Professional Representation
Consider seeking the help of a tax professional, such as a Minnesota tax attorney, to represent you during the audit. Here are some of the ways they can help:
- Provide Legal Representation: A tax lawyer can represent you during the audit process and handle all communication with the IRS or MDR on your behalf. This can help alleviate some of the stress and anxiety that comes with being audited and ensure that your rights are protected throughout the process.
- Explain Your Responsibilities: An experienced tax attorney will help you understand what information the IRS or MDR needs from you during the audit process and can even assist you in collecting documentation.
- Review Your Tax Return: Your lawyer can review your tax return, identify any potential issues or areas of concern that may arise during the audit, and help you address these issues.
- Negotiate with the IRS: If the audit results in proposed adjustments to your tax return, a tax lawyer can negotiate with the IRS or MDR on your behalf to try to reduce the amount of any additional taxes, penalties, or interest owed.
- Represent You During an Appeal: If you disagree with an IRS or MDR finding, your attorney can appeal it. There are several ways taxpayers can appeal an IRS or MDR decision, including:
- Administrative Appeals: You can request a conference with an appeals officer within the IRS Office of Appeals or or MDR Appeals and Legal Services Division. This officer is an IRS or MDR employee who can help resolve disputes between you and the IRS or MDR.
- Alternative Dispute Resolution (ADR): ADR is a process in which a neutral third party helps resolve a dispute between you and the IRS. It can be less formal and more flexible than the traditional appeals process.
- Tax Court: If you are unable to resolve the dispute through administrative appeals or ADR, your attorney can file a petition with the United States Tax Court, which hears cases related to federal tax issues or Minnesota Tax Court,which hears cases concerning state sales and income tax issues.
Step #5: Be Cooperative
If you cooperate with the IRS or MDR during an audit, the process will go more smoothly and the risk of penalties can be reduced. In addition to responding promptly to the original notice and organizing all relevant information, you can:
- Be professional and respectful in all communications with the IRS or MDR. Avoid making accusatory or confrontational statements, and focus on presenting your case in a clear and concise manner
- Ask for clarification when needed. Don’t hesitate to ask for more information if you’re not sure what the IRS or MDR is asking for. Confirming what’s needed beforehand is better than providing incomplete or incorrect information.
How to Handle Avoid a Tax Audit in 2023
Next to “What if I get audited in Minnesota?” your biggest question may be how to handle or avoid a tax audit in 2023.
While there is no guaranteed way to completely avoid an IRS or MDR tax audit, there are some steps you can take to reduce your chances of being selected. Here are some tips:
- Ensure that your tax return is accurate and free of errors. Double-check all calculations and verify that all information is entered correctly.
- Keep detailed and organized records of all income, expenses, and deductions. This will make it easier to both prepare your tax return and provide documentation later if needed.
- Ensure that your tax return is consistent with prior years’ returns. Any significant changes in income or deductions may trigger an audit.
- Report all income, including any side jobs or self-employment income. The IRS receives copies of all tax forms, so failing to report income can increase your chances of being audited.
- Only claim deductions you are entitled to and can substantiate with documentation. Claiming excessive deductions may trigger an audit.
- E-filing your tax return may reduce your chances of being audited. When you file electronically, you can identify many potential errors beforehand.
- Consider consulting a tax professional or accountant to help prepare your tax return. A professional can ensure that your return is accurate and may be able to identify potential issues before you file.
Have You Been Selected for an IRS Audit? Call Us!
Tax audits can be an intrusive and frustrating experience. If you have received notice that you are facing an office or field audit, your next step should be to contact a Minnesota tax lawyer.
Individuals and businesses facing an audit typically seek the assistance of an accountant or other tax professional. Although these professionals can offer valuable advice, they may also be forced to reveal confidential financial information. The attorney-client privilege will protect your information if you hire a tax lawyer.
At Pridgeon & Zoss, PLLC, we help individuals, businesses, and organizations navigate the auditing process. Time and again, our straightforward, strategic approach to tax law has led to favorable results. For more information or to schedule a consultation, contact us today.