If you face a personal or business tax audit, should you represent yourself vs. the IRS? Sure, you could hire an attorney, but that could cost hundreds of dollars per hour, money you certainly can’t afford to spend if you’re going to owe the Internal Revenue Service money, too. Or that's how the thinking could go.
Should You Represent Yourself vs. the IRS? Probably Not
Such logic isn’t always sound. Audited taxpayers may benefit significantly from securing professional representation before the IRS. While the taxpayer doesn’t always win, a tax expert can often reduce – if not eliminate – the additional tax the IRS wants to levy. In some cases he or she can even secure an unexpected refund by finding unclaimed credits and deductions after examining previous years’ returns. (For more, see How Do IRS Audits Work?) Representation can also help you in several ways you might not expect.
Avoid Incriminating Yourself
Enrolled agent Steven J. Weil of RMS Accounting in Fort Lauderdale, Fla., believes taxpayers should never represent themselves before the IRS. “An auditor can use any information you disclose against you. Worse yet, the information can also be passed on to the criminal investigation unit without your knowledge,” Weil says. What's more, auditors may take advantage of taxpayers’ ignorance about the best way to handle an audit.
An auditor might be able to get you to answer questions that you would be better off not answering, Weil explains. A representative acting on your behalf can always plead ignorance of the answer, follow up with you and then get back to the auditor. “This not only buys time for you to think carefully about how you will answer; it may also let the question drop if the auditor fails to follow up on it,” Weil says. “Auditors are trained professionals, and you deserve and have a right to have a trained professional representing you.”
Avoid Expanding the Scope of Your Audit
IRS revenue agents know that taxpayers representing themselves may be easy targets because they don’t understand their rights. An agent may take advantage of this power imbalance to expand the scope of an audit by getting the taxpayer to provide more information than he or she was required to give, which can lead to the investigation of additional items that weren’t part of the original audit. Tax professionals who knows the rules can prevent their clients from overexposing themselves.
It’s better to have representation than to go without because tax issues are usually complex and can have a waterfall effect, says Robin Klomparens, attorney at law with Wagner Kirkman Blaine Klomparens & Youmans LLP in Sacramento, Calif. For example, says Klomparens, proposed tax adjustments can flow into multiple years. If the IRS determines that a write-off has been taken in the wrong year or a loss was carried forward incorrectly, it will affect more than one year’s return. And if adjustments are made to the tax return for an LLC, partnership or corporation, those changes can affect income, deductions, credits, depreciation, gains or losses on individuals’ tax returns. If your representative can help you substantiate your original return and prevent these adjustments from happening, life will be easier for everyone affected.
Keep Your Emotions Out of It
It’s difficult to represent yourself during an audit because it’s hard not to take the inquiry personally, explains Abby Eisenkraft, CEO of Choice Tax Solutions in New York City and an enrolled agent, accredited tax advisor, accredited tax preparer and the author of the book “101 Ways to Stay Off the IRS Radar.” Many taxpayers get defensive, combative or emotional, she says, adding, “It’s best to have a tax pro who can go in and fight for you. Not someone to just carry in your receipts, but someone to strategize and protect your rights and defend your position.”
Things can get especially heated if you think you’re right and the auditor is wrong. “I have gone up against IRS auditors who had the tax law wrong, and sometimes we have to educate them,” Eisenkraft says. “The IRS has cut back on training due to budget cuts, so it can be a problem all around.”
“Most of us don’t have the time necessary to research tax law, investigate what the IRS is questioning and prepare a well-thought-out response to challenge the IRS’s position,” says enrolled agent Dean Ferraro, founder of Authoritax, a full-service tax resolution firm in Orange County, Calif. “It takes a special skill set to know how to maneuver through the bureaucracy at the IRS, to know how to respond to their requests properly and even what to say over the phone.” For young families and professionals who have no extra time but are making good money, Ferraro says it is worthwhile to outsource their tax issue to a professional.
How Many Taxpayers Beat the IRS on Their Own?
Attorney Nina Olson, the National Taxpayer Advocate since 2001, leads a service that helps taxpayers resolve problems with the IRS. She compiled data on 609 federal tax audit decisions, most of them made in tax court, related to the most litigated sections of the tax code from June 1, 2015, through May 31, 2016. She found that the IRS won about 75% of cases outright, while taxpayers won about 10%. The remaining 15% were split decisions. Having made a mistake based on professional advice got some taxpayers out of penalties the IRS wanted to assess.
Olson also found that taxpayers who represented themselves won about 17% of the time, while those with representation won about 22% of the time. Those numbers might make you think it’s not worth paying for representation. But rather than focus on statistics, it probably makes more sense to focus on the specifics of your situation. How serious and complicated is the case against you? How much money do you stand to lose if the IRS – “the biggest, baddest, meanest collections force on the planet,” as Ferraro puts it – wins?
When to Consider Representing Yourself
Experts say it can make sense to handle your own case when the amount of money at stake is too small for it to be cost-effective to hire representation. A simple matter regarding a document mismatch – for example, when your W-2 said you earned $58,190, and you accidentally typed $51,890 on your tax return – is something you can handle on your own. But “if the question is complex, or if it could lead to additional questions, professional representation is the better idea,” Weil says.
You could attempt to represent yourself initially, then change your mind if things don’t seem to be going well. The Taxpayer Bill of Rights allows you to suspend the interview at any time in order to get representation. But you risk saying or doing something you can’t take back that will make your case more difficult and potentially cost you more in both representation and taxes.
As a compromise, consider hiring a tax professional for advice on how to handle your case, then dealing with the IRS yourself. You’ll need to be polite, calm and organized, with thorough records and facts to support your case.
The Bottom Line
If you do decide to be represented, choose carefully and make sure that person is qualified to represent clients before the IRS. Select an attorney, a certified public accountant or an enrolled agent. “Whomever you choose, make sure they have experience representing clients before the IRS and understand your tax situation,” Weil says. Low-income taxpayers can seek help from a Low Income Taxpayer Clinic or from “calendar call” programs that provide volunteer assistance from tax practitioners. (For more, see Surviving the IRS Audit.)