In the final part of our three-part series “how to respond to an IRS audit in 2022,” we’re focusing on the actual response to Internal Revenue Service (IRS).
Watch the video below to learn more from Milikowsky Tax Law’s Founder and Managing Attorney, John Milikowsky, as he explains how to craft the right response.
The Initial IRS Audit Letter
When IRS sends the initial IRS audit letter, they send Letter 6323 initiating the audit. This initial letter gives small businesses 10 days to contact the assigned revenue agent. The reason for the quick turnaround time is to schedule an appointment with the assigned revenue agent to go through a litany of questions to determine the following:
- What income you had
- What sources they were from
- Whether you have cryptocurrency
- What form of bank accounts you used
- And more
What Should You Do After Receiving IRS Letter 6323?
After receiving IRS Letter 6323, review your business’s tax return before meeting with a tax attorney. Partnering with a trusted tax attorney will help guide you to understand the scope of what this audit involves. Moreover, this tax attorney can help create your response to the initial letter within the 10-day timeframe.
What Happens If I Don’t Respond to IRS Letter 6323?
Failure to respond to IRS Letter 6323 in a timely manner will result in an Information Document Request (IDR). The IDR includes bank statements along with any other information relating to what is reported on a tax return—or includes whatever additional information IRS has in their database.
Businesses that fail to respond to IRS requests typically result in the following: The government agency will estimate the business’s income along with disallowing most, if not all business expenses and any other deductions. The business’s income is typically a higher amount than what is reported on the income tax return. Why? Because IRS doesn’t have the source information.
Anticipate IRS summoning your bank account because they don’t need a court order to do so. A revenue agent can send a signed document to your bank requesting all of your bank statements, canceled checks, and deposit items in order to estimate what income should be.
They don’t, however, have the ability to receive the source documents for your expenses. If it relates to your business or charitable contributions, the agency will not look into that—which means they will be disallowed.
More times than not, failure to reply to IRS Audit Letter 6323 does not benefit your business. After the audit review, if you do not respond to IRS Letter 6323, the government agency will calculate a much higher number for taxes due than what’s on your tax return. Because of this, it’s encouraged to respond to IRS in a timely manner.
Another negative consequence of failing to respond to IRS is it can increase the scope of the audit to other issues that IRS may not have been originally looking at, as well as additional years than originally intended.
What To Do If You Receive Audit Letter 6323?
If your business receives Audit Letter 6323 from IRS, contact a tax attorney and your CPA. They will help defend your business against the consequences of an IRS audit.
By partnering with a tax attorney and your CPA, you recruit a team of experts who:
- Comb through your source documents
- Understand each of your deposit items in your bank account
- Ensure accurately reported income
- And more
This way, you are prepared to fight back from IRS claims and come out unscathed on the other side.
An added benefit of partnering with an attorney is protection through attorney-client privilege. If your business misfiled taxes, accidentally or purposefully, you are protected by attorney-client privileges.
Communication with a CPA is not protected in the same way. A trusted CPA, especially if your case leads to any type of fraud or criminal investigation, could be summoned before a grand jury, along with the information requested from him or her.
From day one, speak with a tax attorney to make sure you have the best strategy implemented, and that your communications are protected.
For more information regarding IRS audits, read our article explaining five signs your business is prepared for an audit by IRS.