Next, there's the question of facing up to the opposition - the Internal Revenue Service. And, for most people (sharpies aside), it really isn't all bad. If you filed your last tax return with a nagging doubt, don't become too up tight if the IRS calls you in. This can happen, especially to an executive or professional who's' income is healthy, even if his 1040 is as innocent as a Walt Disney cartoon.
Obviously, unusual deductions and offbeat transactions, such as income-averaging, may flag a return. But so can high income alone. The rules on who gets audited (or partially audited) are not clear-cut. Figure that there's at least a 10% chance of your return being flagged for possible audit if your income is over £25,000. An IRS examiner makes a quick personal check - an "eyeball check" - of a flagged 1040. Only if he sees something amiss is the return tossed on the audit pile.
If you get a notice by mail naming a time and place for an examination, you're probably in for something less than a full audit. The odds are with you; one or two items in your 1040 will get a going over - and the notice will most likely tell you what they are.
The big blunder is to take in your whole file of paperwork, says a London tax solicitor. "You might open up a totally unnecessary line of inquiry."
Assuming you have an adviser - do you go alone, with your tax man, or have him represent you? You might be smart to have him along. "Let him be a personal buffer, if nothing else - don't risk letting off steam," says a Washington adviser. As a novice at tax review, you obviously assume quite a risk going it alone, if a sizable amount of money is involved. In some cases it may be wise to stay away and let your own man take over - you won't get in the way of the tax talk. But let your adviser decide this.
On an involved case, where many records are needed, IRS auditors may visit you if you request it. But the pros say you should avoid such visits. If the agent comes to your home or office, your records (past and present) are all too accessible. "Also, affluent surroundings can work against you," says an experienced adviser. "Call it psychological - but it's a point." The telltale call: If an IRS agent phones and then appears in person at your home or office, you may well be in line for a full audit, no holds barred. Get on the phone fast and check in with your tax man - or try to get one if you have none.
Suppose that, after all, you end up alone at a local IRS office - what's the risk? First, keep in mind that in his own realm the IRS examiner is a professional. He has inspected countless tax returns like yours. He won't push you rudely - but he won't miss any chances to pick up extra tax pounds, either. He has wide discretion and in many cases exercises his own judgment over your affairs. Good rapport can count, and much can depend on his attitude. A favourite beef among IRS agents is that the businessman sometimes "talks down" to them. "It hardly pays - an agent can say 'no' too often," says a pro. So don't go in with a VIP attitude - it may cost you money.
If you think you owe less than the agent claims - and if the disputed amount of tax is £2,500 or less - you can (as of Mar. 1, 2013) ask for a simplified "district conference." Here you talk privately with an arbiter and file no petition. Chances of compromise are good, but if it doesn't satisfy you, you can go still higher inside IRS. When a dispute involves more than £2,500, you must file a statement - and you'll wisely have this prepared by a professional. Next step up is a hearing before IRS's "appellate division," and at this level you would be foolish to appear without a tax man at your elbow. At an appellate division session, you confer with an IRS expert who has great authority: he acts as both judge and jury. It isn't as dire as it appears, though. Usually the theme is bargaining aimed at settlement. In an average year, over 60% of these appeals are settled for less than the IRS had originally demanded.
Going any higher takes you into the local courts; and there is a new speeded-up Tax Court procedure for minor disputes. But this is a way to consume time, expense (tax adviser), and nervous energy. Besides, going to court poses a dilemma: You have no guarantee that the final tax owed will be a cent less than IRS's original bill for tax due. It may be more.
Silver lining: Keep in mind, as you view the whole business of sparring with IRS, that even a full audit of your 1040 need not cause you to become coronary-prone. Usually, about 6% or 7% of all audits actually end up in producing refunds for the taxpayer. And around 40% produce no change in the amount of tax owed the government. If you look back at your last 1040 filing, and get a slight sinking sensation for fear that you may have botched the paperwork and even yet be hit for another big cut of tax pounds (and penalties), don't just sit idle. If real money is involved, sit down with a tax adviser and talk it over. You can always anticipate an audit by gathering every scrap of additional evidence you might need to support your position - in case. And if you think you're really in a bind, you can erase your 1040 as filed by filing an amended return (1040X).
No matter who you hire to do your tax work, remember that you can rely on him and his expertise - but only up to a point. In a recent case (little noticed but important), the UK. Tax Court laid down the law in no uncertain terms to the prosperous taxpayer who leans too heavily on his professional adviser.
Say that you negligently fail to report some element of income: a stock dividend that's taxable because of an option to take cash, a taxable reimbursement from the company that you thought was non-taxable, or the like. You are hauled in by Internal Revenue and hit with a stiff penalty. You claim innocence because your 1040 was prepared by a Accountant or tax solicitor. This is no excuse, warns... see: Where�s The Help