Negotiating With an IRS Auditor

"No man will make a great leader who wants to do it all himself or get all the credit for doing it." -Andrew Carnegie

3.5 Minute read

The IRS fired many tax auditors last week. Two weeks ago, I was negotiating with an auditor for one of our investors.

Our Auditor was one of those fired. Well, I knew she might be looking for a job. Sure enough, she was eager to get a job. We were keen to get a tax-savvy accountant. She is in her second week of preparing for the 2024 tax return onslaught.

Now, as colleagues, we can compare notes. Our unique perspective of both sides of the audit gives us insights that most tax preparers find incredible. Neither of us clearly knows what will happen with audits interrupted by the firing. But we have collaborated and can share some of these insights.

Audit notices can be scary, and sometimes taxpayers will pick up the phone and get involved with negotiating on their own behalf with the IRS about their audit.

I don't recommend this.

But if you get into a conversation with our tax authorities, here are some things to remember.

NEGOTIATION PRIMER

If you research the IRS audit process, one of the first things you read is that IRS auditors cannot negotiate. But that's not entirely true. The fact is that an IRS Auditor's job performance is based mainly on how many cases they have closed, i.e., marked as "agreed."

Auditors face downward pressure from their management that you would consent to their findings and not appeal or go to Tax Court. And while that may translate into you feeling pressured, this gives you negotiating power. The Auditor might even be inclined to overlook certain things in order to get your consent.

Here are a few things to keep in mind:

The IRS doesn't operate like normal private sector entities.

IRS Auditors don't have to follow your way of thinking; their decisions don't need common sense or logic. Your way of thinking about a solution to a problem -- things that might work in your business or personal life -- do not necessarily apply to solving IRS problems.

IRS agents have their own specific internal rules and regulations. This guidebook is called the Internal Revenue Manual (IRM). The IRM contains chapter after chapter, page after page, of IRS procedures on handling almost every conceivable situation – from audits to collections, levies and seizures to tax court litigation. Understanding and applying these rules can give you a significant advantage in your negotiations.

So, with a unique set of rules, significant power over its constituents, and employees who face no financial risk in the outcome, the IRS can be a frightening "opponent." That's why knowing (and applying) the IRS's rules of engagement, understanding its mindset, and recognizing how to work within its power structure is key to success.

Don't wait for the IRS to make all the moves. Be proactive in your negotiations. Understanding the process and asking the right questions can make a significant difference in the outcome of your audit.

When dealing with an audit situation, a good strategy is to ask the Auditor about disallowances she is considering as the audit progresses. Otherwise, they won't tell you what's on their mind until you get the examination report.

It's important not to let the Auditor take the easy way out. Make them face and justify their actions. This way, you can advocate for yourself during the process, rather than after the fact. For example, if they plan to adjust because you didn't produce records, you can ask for time to find or reconstruct the documents.

Here's what I mean:

A. The IRS Auditor tells Brian, a storage unit property owner, that he is disallowing the deductions for the theft of his computer because there is no documentation for the loss. Instead of passively accepting this, Brian should instead get a police report for the Auditor.

B. The Auditor isn't convinced that Tina needed to buy a $50,000 airplane for her construction business. Tina could get a letter from Cox, the general contractor who hired her, saying he hired Tina to work on a project in a remote area inaccessible by car.

It is important to keep in mind that there is a difference between arguing and negotiating.

Negotiation is the art of meeting in the middle. For example, say you lost all your paperwork for a $600 office supply deduction. The Auditor proposes to disallow 100% of the deduction. You can still negotiate here by saying, "Since I made a profit and maintained an office, I must have bought office supplies. I lost my receipts, but my reconstruction of expenses is reasonable. I should be allowed at least 50%."

You'll never get anywhere if you don't at least try.

Remember, you don't have to navigate the IRS audit process alone. Having a professional in your corner who understands these negotiations can be a game-changer. Don't hesitate to contact your tax pro at the first sign of an IRS audit.

BE THE ROAR, not the echo®

Warmly, Janet