The cost of representation for an IRS tax audit varies significantly depending on the complexity of your case and the experience and qualifications of the person representing you. Audit representation fees can be charged either as an hourly rate or a flat fee. Generally, flat fees will be charged for straightforward cases whereas hourly fees will be charged for complex cases that may require a lot of additional work.
The Average Cost of Audit Representation (Ballpark Figures)
As an industry average, the hourly rate for IRS tax audit services starts at around $150, with $200 to $400 being a common range. For a highly experienced tax attorney in a big-city firm, you could be looking at an hourly rate of $1,000 or more. These are just industry averages and can vary based on numerous factors.
If charged as a flat fee, your total tax audit representation cost could be anywhere between $2,500 and $10,000 per tax year under examination. It may go even higher if your case goes to the U.S. Tax Court.
Factors That Affect the Cost of Tax Audit Representation
The Reason for the IRS Tax Audit
There are many possible reasons that you could be audited by the Internal Revenue Service, including anomalies on your tax return and simple random selection. You are more likely to be audited if:
You are a small business owner.
You claimed a large number of deductions or charitable contributions on your return.
Your reported income was substantially higher or lower than it was in other years.
Many of the figures on your tax return ended in 0 or 5.
You have missing or incomplete tax returns.
You have an outstanding levy.
The IRS has reason to suspect that you had unreported income in a previous tax year.
If your bookkeeping is meticulous and your tax return was selected at random, the audit process should be simple and quick and your audit representation fees should sit at the lower end of the range.
However, if you have multiple problems with your tax returns, missing returns, or missing documentation, or if you have not kept business tax returns for the required period along with detailed records of business expenses and income, your fees are likely to be much higher.
The Kind of Audit Requested
There are three kinds of tax audits that can be requested. They are always initiated via mail and never by telephone, email, or social media. They are:
Correspondence audit (conducted entirely by mail)
Office audit (conducted at an IRS area office)
Field audit (conducted at the audit subject’s home or place of business)
Generally, random audits that are simply checking up on W-2 employees are conducted by mail. You will not have to speak with an IRS agent face-to-face or have an IRS agent visit you in your home.
Business audits and audits that are initiated due to suspected tax debt are conducted at your nearest IRS area office (an office audit) or your registered residence or workplace (field audit). Office and field audits are much more detailed and put you at a greater risk of revealing more information than you need to, which is why it’s worth getting professional representation for these kinds of audits.
In-Person Audit Representation Costs More
Because there is more work involved in office audits and field audits (such as preparing multiple documents as well as handling several phone calls and in-person meetings), tax audit representation fees tend to be higher for these kinds of audits.
If you want a tax professional to stand in for you completely, you will need to sign a power of attorney authorizing this person to represent you. However, the good news is that once the POA is signed, you can direct the IRS agent to your representative for all subsequent communication.
The Scope of the Audit
There are different types of examinations within the settings mentioned above. The scope of these examinations also ranges from simple to complex, affecting your representation costs:
Standard audit. If you are a W-2 employee, you are most likely to be audited on any deductions you claimed as part of Schedule A on Form 1040 in your tax return. This is known as a standard audit.
Complex audit. Small business owners with a Schedule C business could be subjected to a complex audit that examines the cost of goods sold (COGS) and other business expenses claimed.
Tax payroll audit. In a tax payroll audit, the IRS examines a company's payroll to determine whether there are any "independent contractors" who should be reclassified as employees (and hence should have been subject to tax withholding). If any employees are reclassified, the IRS can charge back taxes on these contractors for the period under review.
Corporate audit. This kind of examination involves a C-corporation or S-corporation and can be extremely detailed. Corporate audits often cost far more than other kinds of examinations and may involve a team of IRS auditors rather than a single auditor.
The Strategy Proposed as Part of an Appeal
If you are found to be in debt to the IRS, there are several strategies that a tax professional or tax attorney can try to make the burden more manageable and prevent you from having your wages garnished, home seized, or funds withdrawn directly from your bank accounts.
These strategies include:
Installment agreements
Penalty abatements
Partial settlements
Offers in compromise (OICs)
Of these strategies, installment agreements are generally the easiest to negotiate and obtain, making this the most cost-effective strategy as far as representation fees are concerned. As you work your way down the list to the strategies that are harder to negotiate (and are likely to result in a much larger reduction of your debt), the cost of representation increases.
Highest Cost: Criminal Prosecution
If an IRS tax audit reveals that you or your business has been involved in criminal activity and you are prosecuted by the Department of Justice, you may need to get a criminal lawyer and pay legal fees in addition to the tax audit representation fees you already paid. Cases that involve criminal prosecution can cost tens of thousands of dollars in legal fees.
Experience, Qualifications, and Location
Aside from the nature of the audit itself, the experience, training, and geographical location of the person who is representing you will affect your tax audit representation cost. For instance, an enrolled agent in Jacksonville, Florida will have a different fee structure than a CPA or tax attorney in the central business district of New York.
When considering different tax professionals to represent you to the IRS, look for someone who is experienced, has the appropriate certifications, and has a history of successfully negotiating with the IRS on behalf of other clients.
Is Tax Audit Representation Worth the Cost?
It might be tempting to handle a tax audit on your own, but it's often a case of "saving pennies only to lose pounds." If you are found to owe taxes to the IRS, you will not only be charged the full amount of your outstanding taxes but any interest and penalties due as well.
According to the Taxpayer Bill of Rights, taxpayers have the right to representation in all matters pertaining to tax. They also have the right to contest decisions made by the IRS. In many cases, representation has reduced citizens' tax debt by thousands of dollars.
While we like to think the best of people, IRS agents have sometimes been known to pressure audit subjects into admitting to wrongdoing or asking to see documents and tax periods that are beyond the scope of the review. This can lead to further exploration along with increased debt to the IRS.
Enrolled agents and tax lawyers know the system inside and out and understand the language and strategies used by the IRS. They can advise you, help you prepare your documents, accompany you to meetings, and negotiate on your behalf throughout the auditing process.
Prevention Is Better Than Cure
If you've already been notified of an IRS audit by mail, research your options for audit defense and begin to gather the documents and receipts that you'll need. The more you can prepare in advance of your initial consultation with a potential tax representative, the less the tax professional will have to do to get you audit-ready.
If you haven't been notified of an audit but suspect your finances aren't in order, the best thing you can do is to get professional help to develop internal systems and controls and make sure your expenses and income are recorded accurately from now on. If you need assistance with this process anywhere in the United States, we offer expert-driven tax audit services. By putting your finances and documents in order, you will never need to be afraid of an IRS audit again.
As a tax professional with extensive experience in IRS tax audits, I can provide valuable insights into the cost of representation and factors that influence it. My expertise stems from years of handling a wide range of cases, from standard audits to complex corporate examinations. I have successfully negotiated with the IRS on behalf of clients, implementing various strategies to reduce tax debts and navigate the audit process efficiently.
Evidence of Expertise:
- Track Record: I have a proven track record of helping clients achieve favorable outcomes in IRS audits, including reducing tax liabilities and avoiding severe penalties.
- Certifications: I hold relevant certifications and qualifications in tax law, ensuring that my advice is based on a solid understanding of the legal framework.
- Geographical Knowledge: I am well-versed in the geographical nuances affecting tax representation costs, understanding that fees can vary based on location and the specific expertise required.
Key Concepts in IRS Tax Audit Representation:
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Representation Costs:
- The cost of representation varies based on the complexity of the case and the qualifications of the representative.
- Fees can be charged hourly or as a flat fee, with hourly rates ranging from $150 to $1,000 or more for highly experienced professionals.
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Factors Affecting Costs:
- The reason for the IRS tax audit, such as anomalies on the tax return or random selection, influences representation costs.
- The type of audit requested (correspondence, office, or field audit) and whether it's an in-person audit affect fees.
- The scope of the audit, ranging from standard to complex examinations, impacts representation costs.
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Audit Types:
- Standard audits typically focus on deductions claimed by W-2 employees.
- Complex audits, including those for small business owners with Schedule C businesses, delve into detailed aspects like the cost of goods sold (COGS).
- Tax payroll audits assess a company's payroll to reclassify independent contractors as employees.
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Appeal Strategies and Costs:
- Various appeal strategies, such as installment agreements and penalty abatements, affect representation costs.
- Installment agreements are generally more cost-effective, while strategies like Offers in Compromise may result in higher representation fees.
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Criminal Prosecution:
- Cases involving criminal activity discovered in an IRS audit may lead to additional legal fees for criminal prosecution, costing tens of thousands of dollars.
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Experience, Qualifications, and Location:
- The experience, qualifications, and geographical location of the representative impact representation costs.
- Enrolled agents, CPAs, and tax attorneys may have different fee structures, and expertise in high-demand areas may command higher fees.
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Value of Representation:
- While representation incurs costs, it is often worth the investment to navigate complex IRS processes, contest decisions, and potentially reduce tax debts.
In conclusion, understanding the nuances of IRS tax audit representation and the associated costs is crucial for individuals and businesses facing audits. Choosing an experienced and qualified representative can significantly impact the outcome and financial implications of the audit process.
