IRS Audit: A Shoe Box of Receipts vs. Detailed Analysis

You get a notice of an IRS Audit.  Your first instinct (hopefully) is to prove your case. Proving your case entails looking for receipts, checks, tapes, invoices, contracts, statements and schedules that you may prepare to present your case. This evidence will be submitted to an IRS agent either by you or your tax representative; a CPA, a tax attorney or an enrolled agent who is trying to offer you the best tax help.

Our question here is how should you present your evidence to the IRS agent? 

There are two ways to do this: the first is to shove everything, chaotic as it may be, in envelopes or shoe boxes to the IRS and let them have at it. The second approach is to make sense of the documents first and do some fancy work, a rather professional approach before you present it to the IRS.

Shoe Box of Receipts

Advocating the shoe box approach may be easier but it it is not the best. For one, when you throw everything in a shoe box without going methodically over every receipt it may not give you the best tax relief and could undermine your audit should you present a document that should not be there. That may destroy your chance of winning the audit and possibly compound your tax problem.

Secondly, if you follow this approach, you may not be able to determine your own weaknesses and strengths. You may not have the knowledge of the dollar amount that you have evidence for versus the amount that you may concede.

Finally those advocating this approach are hoping to distract the auditor by adding additional burden to his already crowded desk.  Each agent has his share of IRS audit workload. They have pressure from their managers and maybe the CPA or tax attorney is adding more pressure to make the IRS agent compromise. This really does nothing but antagonize the IRS agent who has your tax audit and the auditor may not be as amenable as they would have been if you were cooperating and hoping to reach a quicker IRS settlement.

Detailed Analysis

The other approach is to go to another extreme and do all the work for the auditor. If you do that your tax audit may go a lot faster but you may run the risk of giving the auditor extra time that he would not have otherwise had to munch and ponder on the issues that may not have been available to him due to time constraints. 

The reasonable thing to do is to organize the work papers in a logical sequence, identify each expense and summarize the evidence and the dollar amount for each expense. We even like to do a table of contents to present to the auditor so they may cross reference our work paper and make it easier on the auditor to follow the evidence trail. In many of the tax audits that we have, we get compliments on the way we send the work paper. 

That will start us on a good faith beginning. This is a good approach to tax resolution you may do on your own. Remember, there will be a penalty abatement issue coming as soon as the auditor finalizes his report. There may be other items that can be waived at the discretion of the auditor as well.

There are things that you may not want to get out of your way to accommodate so much, such as the case of sending bank statements. Should you summarize the deposits by revenue versus non revenue deposits to the auditor when it is an intimate analysis schedule they have to perform? The answer will depend on my benefit as a taxpayer. We will summarize those deposits if it is important to direct the IRS auditor to specific issues in the deposits. Only then we will do that.

Generally speaking if we have to choose sides, we will always opt for a professional and organized package that is easy to read and less time consuming to the auditor on your case. This may go a long way for a favorable audit tax settlement.