Should I Hire a Tax Pro If I Am Facing an IRS Audit?

If you are facing the potential of an IRS audit, likely one of the decisions you are grappling with is whether you should seek out and hire some sort of professional representation.

This article will weigh the pros and cons of paying a third party to represent you in an audit, as well as provide you with some oversight that hopefully will assist you in making such a decision.

To begin with, it's important to recognize that the vast majority of audits are conducted via the mail, and a good portion of those are only for under-reported or unreported income.

The IRS has three years to perform a document matching check. This means that the IRS compares all of the income as reported on your tax return with the payer documents that have been reported directly to the IRS or to Social Security, such as the form W-2 or one of the forms from the 1099 series.

If an income source has been omitted from your tax return, or if you have failed to report the full amount of income from that payer, the IRS will assess the difference in tax, along with any related penalty and interest charges. This is done typically via a CP-2000 letter, which will propose the tax increase, identify the source of the assessment, and ask you to respond by a specific date.

Your options are to respond to the IRS that you understand the assessment, in which case you can select one of the various repayment options listed, or that you disagree and would like the opportunity to submit documentation to dispute the assessment.

A failure to respond will result is a default assessment, and the IRS will begin collection of that balance.

All of the above actions are steps that any taxpayer can take, absent having to pay a costly third party. Consider however the source of the potential assessment. If the income was from a W-2, then there is likely no clarification needed and no source of dispute. However, if the proposed balance is stemming from a 1099-C Debt Cancellation, a real estate sale, brokerage income, self-employment income or some other more complicated source, then unless you have a clear understanding of the audit, you may be better served speaking with someone.

However, before you make a phone call to someone you found in the Yellow Pages or online, a simple telephone call to the IRS will likely help you to understand the notice. IRS representatives are trained to assist you in understanding why you owe; it's part of their job to educate you as to your filing and payment obligations.

If you do decide to bring on and pay a third party, please be aware of the designation level of the person you are hiring. The individual could be an attorney, CPA, or Enrolled Agent, in which case they are unlimited in the capacity that they can represent you. Enrolled Agents are educated directly under IRS oversight and have passed strict tests. They also may be qualified because they are former IRS employees.

On the other hand, be cautious as to someone who is only an Unenrolled Return Preparer or a Form 8821 Designee.

Unenrolled Return Preparers are not recognized by the IRS as passing competency tests. In that sense, they are "unenrolled" and can only discuss with the IRS information regarding the return they prepared, and even then their scope is limited to non-collection and non-appeal discussions.

The Form 8821 is used to designate any third party as being capable to discuss and obtain information about your taxes or account. CPAs, attorneys, Enrolled and Unenrolled Agents will ask that you sign a Form 2848, Power of Attorney, so that they can call and represent you before the IRS. If a person does not have these credentials, they will ask that you sign the Form 8821, Tax Information Authorization.

The 8821 Designee has no ability to represent you in a collection matter. They cannot negotiate timeframes or execute any type of closing agreement, such as setting up a payment plan for you, nor can they sign any necessary waivers.

Be cautious as to hiring a CPA or Attorney, who also then has you sign a Form 8821. Many large firms use the inexperienced and unqualified 8821 Designees to do the bulk of their work, and then the CPA or Attorney, who holds the formal Form 2848 Power of Attorney, will enter the discussion only at the end to approve and close any agreement reached with the IRS.

More from this Contributor:

What questions should you ask before choosing a tax preparer?