How to prepare for your initial IRS Examination interview

Requests to interview the taxpayer and return preparer at the beginning of an IRS civil examination are routine, and potentially fraught with perils for an unsophisticated taxpayer or representative Examinations (or “audits”) are typically focused on issues, areas or industries having a historically high rate of non-compliance. The audit might also be initiated because the IRS received information from a related examination of another taxpayer, or perhaps someone (disgruntled employees, ex-spouses or business partners, competitors, or financial mercenaries seeking a whistleblower reward) purposely and intentionally provided information to the IRS relating to the taxpayer.

WHAT IS THE INITIAL INTERVIEW. This is the scheduled first meeting between the auditor and the taxpayer, for the purpose of eliciting background and relevant information relating to the tax returns under examination. It often feels like an interrogation, as the auditor probes for leads to known and unknown areas of noncompliance, inconsistent statements, and problems caused by poor record-keeping. The IRS tells its auditors that since there may only be one opportunity to interview the taxpayer, “thorough preparation and planning of the initial interview is necessary to ensure the maximum amount of information is obtained.”

TIMING OF THE INTERVIEW. Agents usually seek to conduct an initial interview as soon as possible after opening a case and schedule subsequent interviews if all requested information is not provided, if more detailed explanations are required, or to review the progress of the examination. In many cases, a representative can avoid the initial interview, attending in place of the taxpayer. This obviously has the advantage of separating taxpayers from their adversary, and exerting more control over the process.

QUESTIONS. Other than for background information, the interview questions are tailored to the individual taxpayer and situation. But typical questions are as follows. Did you meet with the return preparer? What documentation was provided to your preparer? Did you receive a copy of the return or claim? How was the preparer compensated? Are you aware of any errors, omissions or mistakes on the return under examination? Did you disclose this transaction on your tax return? Why? Why not? Were there any concerns about how the transaction was reported. Was there any discussion regarding potential penalties? Was there any discussion regarding whether the transaction is subject to disclosure. Have you reported all income you received on the return. Are all the deductions claimed accurate and correct?

Each examination is different - different taxpayers, different agents, different facts and issues, etc. Taxpayers and their representatives need knowledge of administrative procedures and the ability to handle each phase of the examination. Understanding the scope of permissible inquiries, and how to deal with difficult questions may be the difference between a quick resolution and a criminal tax referral.