The potential for IRS auditing haunts all tax payers. The thought of an ominous notification, followed by a demand for money, looms over the head of most American citizens. Even if you pay your taxes perfectly every year, there is still a threat.
As we have seen in the past, the auditing skills of the IRS are not to be trusted. They hope to take advantage of the ‘ignorant’ American — assuming we couldn’t possibly understand how to defend ourselves.
To help you better understand your rights in any auditing case, Forbes gives some tips:
You can withhold documents that are protected by attorney client privilege and those that are covered by work-product protection. The latter covers documents created in anticipation of litigation. This protection has wide application, not just to tax litigation. If the IRS issues an Information Document Request or subpoena, you may be able to legitimately refuse.
Unlike the IRS (who acts in a state of lawlessness), we can use the laws to our advantage. It is also important to know who to have on your team:
Having lawyers hire accountants can bootstrap attorney-client privilege to accountant communications, allowing attorney-client privilege from an accountant. That makes sense where tax litigation is imminent or might involve an IRS criminal matter. Work product protection is much narrower than attorney client privilege.
Keep legal opinions and memos on tax matters in a separate file. Don’t just have a “tax” file. If you have a big tax issue (say a lawsuit recovery, a casualty loss or conservation easement), keep that file separate.
Segregate tax issues. Keep a file on each and don’t comingle them. That way if you turn over a file you’ve limited the disclosure to the pertinent topic.
If you maintain tax accrual work papers, limit them to numerical analyses. Keep tax memos in a legal file, preferably with your lawyer. Think of tax documents as tax returns and spreadsheets only, numbers rather than words. Keep legal issues associated with taxes (discussion of case law, IRS rulings, etc.) in a legal file.
The IRS does not have the right to demand access to every scrap of tax paper you own.
Yes, you may owe money. Yes, the IRS may win in a court of law. Yes, you will have to pay. But first, give yourself a fighting chance with the most possible knowledge. The more you know about your rights, the less the IRS can take advantage of you.
Don’t give up the instant you receive a demand for more. Fight it, question it — but do so wisely.