August 20, 2014

There is no sugarcoating the fact that receiving an IRS tax audit notice is almost never good news. But unless you have deliberately hoodwinked the IRS, you probably have less to worry about than you think. You may not walk away unscathed, but you likely won’t wind up wearing an orange jumpsuit, either.

Be Prepared to Come Clean

If the IRS audit covers tax periods where you know you’ve been less than forthcoming, now is the time to come clean. File that missing tax return, or file an amended return to account for the income you omitted earlier. When the auditor asks about that particular item, you can state with confidence that it’s been taken care of. If you’re lucky, that may be enough to convince the agent to end the audit then and there.

Brace for the Worst

Yes, you probably will wind up paying more money to the IRS as the result of an audit. The vast majority of tax audits conclude with the taxpayer owing more. Start setting aside funds so that when the final assessment is made, you’ll be able to reduce the bill by a decent amount. If you know that you cannot pay, be ready to offer an action plan for installment payments. Don’t suggest a plan that forces you to function at absolute subsistence level. It’s not necessary and the IRS agent will be skeptical that you can actually follow through with such an austere budget.

Get Backup

If your audit is being conducted at a local IRS office, in your home or at your place of business, the agent will probably conduct a thorough inquiry of your documentation of the particular tax returns in question. You don’t have to face the inquiry alone, and you shouldn’t. If you had your return prepared by a third party, he or she should be present at the audit. You also have the right hire a representative to go with you to the audit even if you prepared your own return. (IRS.gov: Taxpayer Rights)

Just the Facts

Being honest and forthcoming with an IRS agent in giving responses to his or her questions is smart. Volunteering information, not so much. Pay attention to what the agent is asking you and limit your responses accordingly. Otherwise, you may disclose issues the agent previously had no idea about, which could jack up your tax bill considerably. Likewise, if the agent asks you about a matter unrelated to the tax returns that were included on the IRS audit notice, it’s OK to let the agent know that you do not have the proper documentation available to respond to that particular inquiry.

Say No to Extended Deadlines

You usually have several months to prepare for an audit, which should be plenty of time to track down past years’ tax returns and other relevant records. But the IRS may request a waiver of the normal three year statute of limitations. You have the right to refuse.

Statutes of limitations generally limit the time the IRS has to make tax assessments to within three years after a return is due or filed, whichever is later. That particular date is also referred to as the statute expiration date. Statute of limitations will also limit the time you have to file a claim for credit or refund. (City Data)

If you are uncertain about what to do, consult with a tax attorney or certified public accountant before consenting to the waiver.

Remember, IRS Agents are People, Too

Although the IRS agent assigned to conduct your audit may come off as a complete bean counter, remember that he or she is human. Show a bit of common courtesy and conduct yourself in a cordial and professional manner. Like all human beings, IRS agents make mistakes. If you believe the agent is off the mark with his or her assessment of your tax obligation, you have the right to ask to speak with a supervisor or file an appeal. Just be prepared to support your claim with copies (not originals!) of receipts, cancelled checks, certifications or other relevant documentation.

You Will Survive

Unless you are found to have blatantly flouted IRS regulations, your tax audit will most likely not result in criminal charges. If the auditor slaps you with a huge tax bill that you agree with but cannot pay, you can usually negotiate a deal to pay off what you owe. Your financial affairs may also be better organized than before the audit, which may be the silver lining in an otherwise very dark cloud.

Additional Tax Topics:

The IRS Criminal Investigation Process
What to do during an IRS Audit
What does the IRS look for in an audit?
IRS penalty and interest rates