IRS audits usually aren’t completely random. The agency selects returns with errors, outlier figures and dubious expenses based on complex criteria. Most tax audits begin a year after you file your return and are finished in less than a year.
Most are correspondence audits — handled through the mail. Mail audits are limited to the few items listed in the audit letter you receive. Unless you understand the issue and can easily resolve it on your own, get help from a tax accountant or attorney to go through the audit letter and determine the best course of action.
If you have an in-person audit, you’ll be asked for information and documents that explain your position on the tax return. Provide information just as the IRS requests it. Here are a few things you can do:
- Postpone the audit or request more time to get your records in order, which works to your advantage. From the IRS’s point of view, the audit must be completed within three years of filing the tax return unless the agency finds tax fraud or a significant underreporting of income.
- Don’t host the audit at your business or home. If the IRS would prefer to host the audit at your business, consult your tax pro.
- Have realistic expectations. Don’t expect to come out of the audit without owing something — the odds are against you. The average adjustment for an audit held at an IRS office is $4,000. The average adjustment for a field audit is $17,000.
- Be brief. Give auditors no more information than they are entitled to, and don’t volunteer information. Prepare to answer in-depth questions about your finances and activities. If you have something to hide, don’t provide evidence, but don’t lie either. Adjustments the auditor may make can be less damaging than if you had divulged more.
- Don’t offer other years’ returns, and don’t bring to an audit any documents that don’t pertain to the year under audit or weren’t specifically requested.
- Reconstruct records if you’re missing receipts or other documents. If a third party can attest to an undocumented item, you can use affidavits. Organize all the records. Organization can impress an auditor, showing that you’re conscientious.
- Negotiate. Ask the auditor about disallowances they’re considering and defend your position. Don’t try to negotiate the amount of taxes, but stick to the tax issues, like whether a deduction should be allowed. If you disagree with an IRS stance, present your interpretation.
- Know your rights. Before the audit, read about your rights as a taxpayer. Research tax legal issues through free IRS publications and commercial tax guides. If you’re unclear about tax law or how to present your documents to the auditor, consult a tax pro.
- If the subject of tax fraud comes up, don’t try to handle it yourself. This means the audit is not going well. You can demand a recess to consult a tax professional, and ask to speak to the auditor’s manager if you think you’re being treated unfairly.
Can you appeal?
Yes, there is an appeal process. Fewer than one in 10 audited taxpayers appeal, but appealing is neither time-consuming nor difficult. Your chance of achieving at least some reduction in taxes is excellent. You rarely need to hire a tax professional to file an appeal. But most taxpayers become either too discouraged or intimidated to do so. The average appeal results in a 40% decrease in taxes, penalties and interest imposed by the auditor.
A tax professional can represent you and advocate your position before the IRS. The IRS will close the audit by either proposing no changes or making adjustments to your return. You’ll get a report on the IRS’s findings and a letter that allows you 30 days to reply.
As stressful and overwhelming as an audit may seem, there’s no need to panic. Take the notice seriously, but be aware that you should be able to resolve it quickly.
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