Tax Audit and Investigations

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When the Internal Revenue Service (“IRS) or New York State Tax Department conducts a tax audit, it is represented by a team of well-trained tax specialists, tax audit examiners, CPA’s, and their own Tax Attorneys. If your tax return is selected for an audit, you need to take immediate action to level the playing field with your own tax experts and experienced, knowledgeable tax attorneys who specialize in tax law who can provide the tax help you need.


The IRS or NYS tax audits generally fall into one of the following three categories:

Office Audit at a local IRS field office.

The office audit is a meeting set up with the IRS, and the IRS requests specific documents that you bring with you to the meeting for their review.

Correspondence Audit (mail audit) where the IRS send written questions.

With this type of tax audit the request for more information about your tax return comes by mail. Typically, the IRS or State will ask you to mail to them certain documentation supporting various items that you filed on your tax return. The IRS tax audit will generally take a few months to complete, and the State audit will be typically quicker. 

At-Home/At-Business tax audits.

This occurs when you receive a letter that the IRS or NYS, and they request to have a meeting at your home or business office to conduct a field audit. The IRS will send an auditor or IRS agent and the State a tax auditor or investigator. This technique is mostly for business tax audit issues. These are typically the most serious types of tax audits that a tax relief attorney can assist with. One example of this type of audit, is a NYS sales tax audit of your business.

Typically, the audit process begins when you receive a letter stating that your tax return has been selected for examination. This does not mean that the IRS or NYS is accusing you of cheating on your tax return or engaging in any other wrongdoing of any kind. However, the overall goal of the audit process is to increase tax compliance and the revenue collected by the US Treasury Department and the State of NY. The moment you receive notice of an examination is the right moment to seek tax counsel to protect your rights as a taxpayer to lawfully pay as little tax as possible and be correctly represented. Since there are many types of audits, we will not go into the details here of how we would handle your case from the viewpoint of a tax professional since we offer free consultations to provide such details to you of our audit representation services.

Tax Audits – Receipts

Many new clients call us in a panic when they receive a audit notice letter that their income tax return has been selected for an audit. In most cases the client knows that they either overstated their tax deductions or less likely did not report all their income. In either case, being caught is not a pleasant feeling when you receive a IRS Audits inquiring about your receipts. When the IRS audits an income tax return for deductions, it focuses on whether you have a receipt. From the basic perspective, the IRS is looking for a stack of receipts that add up to the tax deduction taken on the income tax return.

A lot of clients think that a bank statement or credit card statement is a receipt. This is not correct, since a bank statement or credit card bill only shows that the expense was paid, but not the details of the item purchased to verify it is a business deduction. Therefore, it is important to save the actual receipts to get the tax deduction you are entitled to. For a business, the State may be looking for adequate business records such as Z Tapes. 


Audit Reconsideration Process

Both the IRS and New York State has an appeals system for taxpayers who do not agree with the results of a tax examination of their tax returns by an auditor, or with other adjustments to their tax liability.

The tax authorities will send a report and/or letter that will explain the proposed adjustments that they wish to make. The IRS letter will also tell you of your legal right to request a review conference with an Appeals Officer, as well as how to make such a request for a conference. In addition to tax examinations, many other things can be appealed such as penalties charged. If you request a Tax Appeals conference, be prepared with records and documentation to support your position that we will help you compile. Appeals conferences are informal meetings. If you do not reach agreement with the Appeals or Settlement Officer, or you do not wish to appeal internally within the IRS, you may appeal certain actions through the US Tax Courts, or state and federal courts.

Therefore, if you disagree with how much they say you owe as a result of an tax audit, there is a process to correct the problem. The procedure is known as an audit reconsideration process and is allowed when:

  1. You or your representative did not appear at the audit to provide your information that would support the items on your income tax return. This could be the result of you moving, and you did not get notice that an income tax audit was occurring. This is also the case, if you simply decided that you would not attend the audit (for instance, you were scared or intimidated)
  2. You have additional documentation that was not available when the “original” audit was conducted. This often happens since gathering the items needed for an audit (bank records, receipts, etc), takes time to gather and organize, and perhaps that was not done in time for the audit meeting
  3. You disagree with the assessment from the audit and the tax bill is unpaid
  4. The United States Tax Court has not issued a final determination of the issue (if an IRS audit)
  5. You did not agree to the assessment (for instance by signing a Form 906 or NYS Au-346)

There are steps that need to be closely followed to be eligible for an audit reconsideration.

  1. The first step is to review the audit report to determine the adjustment items that you disagree. The auditor usually provides a detailed report of each adjustment to your tax return.
  2. Gather the documentation (receipts, cancelled checks, bank statements, mileage logs) to support your position, and make sure it’s not the same information presented a the audit (if there was information initially shared)
  3. Make sure the bill has not been paid. If it has, then you need to file a formal claim for refund (Form 1040X, etc)
  4. Create a letter explaining your position, and attach all the documents that you have for proof. You can also use Form 12661 for this purpose. Also attach to your letter the Form 4549 that you received from the auditor. Please do not send the IRS original documents, since their is always a risk that items may get lost. It does not happen often, but to be safe only send copies of items. Then make a copy of the whole submersion, and mail it certified return receipt mail.

The process to have them review the items presented can take many months for the IRS audit consideration process, and shorter for NYS. They will issue a letter that the information has been received, and if they need any further information. The IRS will also notify you once they make a change to the tax assessment, but continue making any tax payments under a payment plan that was established for the tax bill. If you disagree with the audit reconsideration results, you can request an Appeals Conference.

As tax lawyers we specialize in many types of tax audits, including income tax audits, sales tax audits, payroll tax audits and a number of specialty tax audits so please contact our attorneys today to discuss your tax problems with our tax relief tax experts who can provide the tax help you need.

Sales Tax Audits

We can assist with Sales Tax Audits. There is no denying that a sales tax audit is not a pleasant encounter with the New York State Tax Department. I guess any interaction with the tax authorities is likely to produce an uncomfortable experience but going through a detailed sales audit is like going to the dentist. As a tax attorney who assists clients with providing guidance through all phases of the sales tax audit process the goal is to have the audit produce minimal pain and little financial loss.

Through many sales tax audits, we have gained an original perspective on the motivations on the State Tax Department to improve their taxing abilities by being aggressive with imposing taxes. As troubling as this may appear, it must be remembered that the best offense is a great defense. In many cases, a typical client does not spend the time to compile the necessary and sufficient documents to meet the needs of the auditors. This is a huge mistake, but you may ask why do we care about the tax auditors, and if they review the right records? In a few words, they will make your life hell if your records are poor. Often, most taxpayers do not have the correct records, so the first step is to organize their records which will make the audit go much better, and reduce the cost of crazy wild guesses by the tax department in their quest to create a tax bill. Any time a client does not have ample tax records, the tax laws and regulations allow the state to start calculating the taxable sales, and they never come out on the low side.

Seeing that having good records can be so critical to a successful sales tax audit, we spend a lot of time with my clients to organize and improve their sales tax records before the sales audit begins. They are often shocked at the level of detail we make their records. When the actual audit starts, we (my client and I) sit along with the auditors and be available to answer questions and try to manage the process. Trying to influence the auditor is key, and honey works better than vinegar, if you know what I mean. Most clients are uncomfortable at first being at the sales tax exam, but after a while they understand the value in being there to help reduce their bill. Also, by showing our real human side and showing that we will not be bullied around, in all times in a friendly nonetheless productive manner, a positive difference can be had. If the sales tax auditor is being debilitating to constructive progress, then we can ask to speak to the persons supervisor and division group manager if we decide that would be productive. If all else fails, and where the client’s records have no value we try to reach a low tax settlement. In the conciliation conference, a mediation comes about between the taxpayer and tax department to come to a settlement. Often the results of this process are very good, and a reasonable result can be obtained to lower the tax bill to amount that can be paid all at once, or a reasonable payment plan can be established.

Sales Tax Responsible Party

The legal term responsible party for NYS sales tax purposes often arises when a sales tax obligation is not paid, and the State of New York is attempting to hold a person other than the company liable for the unpaid sales tax. The legal term itself, under NYS tax law, relates to defining an individual or group of individuals who have a level of control over the assets of the entity. Typically, this would either be an owner of the company or an officer/ managing member of the company (or LLC). Therefore, the logic is that since they made the financial decisions of the company, they should be liable when those debts are not paid.

Under NYS Tax Law a responsible person is jointly liable (with the company) for the unpaid sales tax owed (or any of the business’s other responsible persons). Sales Tax Responsible Party can mean financial trouble if there are unpaid sales taxes for the audit period.

In the case of a partnership or LLC, section 1131(1) of the NYS Tax Law provides that each partner or member is a responsible person regardless of whether the partner or member is under a duty to act on behalf of the partnership or LLC entity. This means that these persons can be held responsible for 100% of the sales and use tax liability of a business in addition to the company. The New York State Tax Department recognizes that this situation can result in severe consequences for certain partners who have no involvement or control of the business’s financial issues. Accordingly, the NYS Tax Department has developed a policy that gives some protection from per se personal liability for unpaid sales taxes for certain limited partners and members of the LLC.

Nevertheless, entities should consider alerting NYS of a change in identity of their responsible party and contacting a NY Tax Attorney if you have been held liable for the unpaid sales taxes of a company to see if your are eligible for this relief.

How long to keep Tax Records

Because of this almost unlimited timeline of where tax records would be useful, it is always best to keep your tax records for life. Yes, it does sound long and it is, but it is even more painful trying to prove to the IRS some fact, when you do not have the tax records. I had a client in 2012 and we asked for tax documents going back to the 1980’s, and they were able to produce them and we won their case and saved them a lot of money.

There are also non-tax reasons to keep the records. The Form W-2 (your wage statement) can be used to verify that the Social Security Administration has the correct earnings records for you.

Therefore, for a good review read the IRS publication 552, record keeping for individuals which is available on the website.

By: Timothy S. Hart

We Can Help You No Matter Where You Live.

Our New York tax law firm offices are located in New York State but we are able to help you in any state across the country. We can work with you no matter where you live. Mr. Hart is licensed to deal with the IRS in every state in the entire country.