“Audits of taxable estates are also on the rise and can have significant impact to the estate and its heirs,” added David Levi, senior managing director at CBIZ MHM based in Minneapolis. “Discounts for closely held businesses and other investments ... should be supported by quality appraisals that take into account both the asset being appraised as well as any limitations or other factors relevant about the ownership structure of the asset.”
The IRS generally audits back three years but could audit up to six years or longer. Behaviors that that can lengthen the statute of limitations on an IRS audit include underreporting income; overstating basis in an investment or asset; omitting foreign income, gifts and assets; or filing a fraudulent return or not filing a return at all.
“Audits of high-income taxpayers can occur closer to the end of the statute of limitations,” Levi said.
Audits can take several formats, said Jim Brandenburg, a Milwaukee-based tax partner at the professional services firm Sikich.
“Some are correspondence-type audits where the IRS may look at certain aspects of a taxpayer’s income tax return. ... In other cases, the taxpayer will encounter an audit where they will need to visit a local IRS office for a tax audit,” Brandenburg said, adding that a taxpayers's advisor may accompany them to such meetings.
Be prepared right from the start when you take a tax position, advisors said. “Even if the position is aggressive, having your justification when filing is significantly better than trying to put together documentation and support under the pressure of the exam,” Levi said.