Thomas pulled into the driveway and stopped to grab the mail like he did everyday when he got home from work. He pulled a stack of envelopes and a couple of flyers out of the mailbox and sat back down in the car. He thumbed through the letters – credit card offers, a couple of bills, and one from the Internal Revenue Service. Thomas’s palms began to sweat and his heart felt like it was going to beat out of his chest. He placed the rest of the mail on the passenger seat and opened the envelope.

Thomas held several pages in his hand, covered front and back with black and white type, but the only part of the letter on which his eyes could focus was the number $10,000 in the upper third of the first page – the amount the IRS was alleging Thomas owed in taxes after his return was examined. Thomas ran a small business and reports his business income and losses on Schedule C, Profit or Loss From Business, and the IRS disallowed several deductions he had claimed on his Schedule C. Thomas simply stared at the number on the page, unsure of what to do or even where to begin.

This “examination” is often referred to as an audit and is much more common than you might think, as owners of small businesses often report their business income on Schedule C. The most important thing to know is that an IRS audit is an administrative action. It does not start as a criminal investigation and does not end with going to jail. Criminal tax evasion is a completely different matter.

The next thing to know is that working with the IRS is easier than many people think – if you know what you are doing. The IRS cannot legally require you to pay more in federal income tax than you actually owe. There might be penalties and interest in addition to the underlying tax liability, but if you can prove that you are entitled to claimed deductions or did not receive income the Service says you did not report, you do not owe the amount the IRS alleges you owe.

The key to prevailing in any IRS audit is documentation. The federal income tax return you file with the IRS simply reports what you owe in taxes for that year; it is not proof of what income you earned or the deductions to which you are entitled. Receipts, invoices, bank statements, etc. will help prove your case to the IRS hearing examiner. If the hearing examiner is not satisfied with your documentation, you have the right to have the determination reconsidered. After the reconsideration, you will receive a letter from the IRS stating its determination. This is commonly called a “30 day letter” because you have 30 days in which to request that IRS Appeals review your case. If Appeals agrees with the hearing examiner, you will receive a Notice of Deficiency, commonly called a “90 day letter”. This notice is the IRS’s final determination of your outstanding tax liability. You have 90 days from the date of the notice to file a petition with the U.S. Tax Court. If no petition is filed with the Tax Court, you lose the right to challenge the underlying tax liability and your only options revolve around how to pay the amount of tax the IRS has determined that you owe.

Receiving a notice from the IRS can be unnerving. The tax code is complicated, and the process of determining the correct amount of tax you owe can be cumbersome and time consuming. The process is time sensitive and missed deadlines can have a detrimental impact on your right to challenge the IRS’s determination of the amount of tax you owe. Having an attorney who understands the tax code and the process of handling an IRS audit is an invaluable ally. 

If you have received a notice from the IRS and have questions about how to proceed, please call me, Charles Jeane, at 703.530.9001. I have concentrated in the area of taxation since my graduation from law school. I have experience in both tax litigation and the policy behind the creation of tax law. I obtained my LL.M. in Taxation from Georgetown University Law Center and then was an attorney-advisor for two years at the U.S. Tax Court. When I left the Tax Court, I accepted a Visiting Assistant Professorship at the UDC David A. Clarke School of Law in Washington, D.C. to be the Director of the law school’s Low Income Taxpayer Clinic. There, I was the supervising attorney for cases that ranged from administrative hearings before the IRS to litigation at the U.S. Tax Court. Most recently, I was Louisiana Governor Bobby Jindal’s Tax Policy Advisor.