You have received the dreaded notice that your tax return is being subjected to official review. In other words, you’re being audited. While an audit is never good news, neither is it necessarily a catastrophe. Keep your wits about you and follow a few strategies suggested by experts, and you will survive your audit and live to file another tax return.
1. Know What Type of Audit You Are Facing
There are three types of audits: correspondence or mail audits, office examination audits and field audits. An overwhelming percentage of all audits – approximately 75 to 80 percent – are correspondence audits. Correspondence audits are usually limited to one or two specific questions. Once the IRS receives satisfactory responses, you’re done.
Office examination audits are conducted at a local branch of the IRS. You will need to attend in person, but you are allowed to be accompanied by your accountant or attorney. Field audits are conducted on your turf and are the most comprehensive. As with office examination audits, you are allowed to have representation present during a field audit. In fact, it is highly advisable.
2. Understand What Auditors are Seeking
While each audit is different, all audits focus on three basic questions:
- Is your business truly a business – or just a hobby?
- Are your deductions legitimate?
- Did you report all your income?
If you can answer these three questions to the satisfaction of the auditor, you stand a good chance of emerging from an audit relatively unscathed.
3. Get Your Ducks in a Row Beforehand
Read the letter you receive carefully. If you are dealing with a correspondence audit, determine which documents you need to collect to respond to the questions posted in the audit notification letter. If you must report in person for an office audit or prepare your home or office for a field audit, ensure that your paperwork – and your representative – will be available and ready. Prepare your responses to the points that have been raised for the years that have been included in the audit notification letter.
4. Ask for More Time if Needed
In most cases, you should have sufficient time to adequately prepare for an audit. But if you must retrieve past year returns or other documents that are difficult to obtain, you may need more time.
Ask for a recess or an extension as soon as you know you will need one. If the IRS refuses, mention that you want more time to obtain professional advice – a request which the IRS must grant.
5. Be Totally Truthful in Your Responses
Seriously, lying to an IRS auditor is a bad idea. First, IRS auditors will frequently ask questions to which they already know the answers, just to determine if you are being straight with them. Get caught in that sort of a lie and you’re done. Second, IRS auditors are not likely to take your word for whatever you say. If you make a false claim, you will have to provide false documentation to back it up. Can you see how this sort of conduct could eventually lead to a criminal tax fraud or tax evasion charge? Just don’t do it.
6. Don’t Volunteer Information
Be as transparent as possible in your responses to the questions you are asked. At the same time, do not volunteer information that the IRS agent has not requested. If your audit only covers two years worth of taxes, don’t offer paperwork for the last decade’s worth of expenses. If you want to prepare documentation for the past decade just in case, that’s fine, but let the IRS agent do his or her own job.
7. Substantial Compliance Is Your Friend
Nobody is perfect. Even the IRS recognizes this. If you can prove that you have properly claimed a tax deduction or credit, odds are good that the IRS agent will allow it, even if you lack some documentation. The IRS calls this substantial compliance. This doesn’t mean that you can be sloppy about documentation. It does mean that if you just can’t find one drink receipt from a business trip but your hotel bill, airfare receipts, meeting agenda and other documentation are in order, you can probably relax.
8. If You Disagree, Appeal
If you disagree with the outcome of an IRS audit, you do have the right to appeal. Begin by contacting the auditor directly. If you can’t get satisfaction that way, go to his or her superior. If you’re still not satisfied, more formal recourse is available.
One option is to request alternative dispute resolution (ADR). You may also file a request with the Office of Appeals. You may also file legal action with the Tax Court. If you are slapped with tax penalties in addition to owed taxes, you may be able to get at least some of them waived, reduced or abated — eliminated altogether. (IRS.gov)
9. If You Agree but Can’t Pay, Negotiate
If you agree with the outcome of the audit, even grudgingly, but you just don’t have the cash to pay what you owe in full, don’t panic. Pay what you can and negotiate for terms you can deal with to cover the rest. If you owe $25,000 or less, you may request an installment agreement by filing Form 9465, Installment Agreement Request either online, by mail or in person. If you owe more than $25,000, file Form 9465-FS, Installment Agreement Request. You may also make payments by automatic payroll deduction by filing Form 2159, Payroll Deduction Agreement.
Related article: Top 10 Benefits of Working with a Professional Tax Relief Firm
10. Don’t Go it Alone
With the very simplest of correspondence audits, you may be able to gather the necessary paperwork and respond on your own. Nonetheless, it doesn’t hurt to have an accountant or a tax professional like those at Optima Tax Relief check over your response before you send it to the IRS. For in-person audits, hiring a professional to help you deal with your audit is highly advised. If you aren’t sure, find out if you need to “lawyer up” here.