August 15, 2014

You’re being audited by the IRS. You don’t know exactly what you are in for, but you’re convinced that it can’t be good. You have heard the horror stories and are bracing for the worst. While it’s true that an IRS audit notice is almost never good news, unless you have deliberately tried to scam the IRS, it doesn’t have to be scary.

Related article: Top 10 Ways to Avoid a Tax Audit

First, Don’t Panic

First of all, don’t panic. You aren’t going to prison. You won’t end up destitute and living in a van down by the river. Even if you wind up owing the IRS big time, the odds are good that you will be able to work out a repayment plan. These days, the IRS has significantly changed its approach to be more cooperative with taxpayers.

Determine What Type of Audit You Are Facing

Remember the letter you received from the IRS? Go back and read it again. The letter will inform you of the type of audit you are facing, which years are under investigation, and the date and time the IRS expects you to provide the information it is seeking.

Best case scenario, the IRS is pursuing a correspondence audit covering one or two elements of a single year’s tax return, with a deadline by which the IRS expects to receive your reply. Correspondence audits are conducted entirely by mail and make up 75 to 80 percent of all audits. An in-person interview audit takes place at your local IRS office and is scheduled for a particular date and time. A field audit is also scheduled for a particular date and time, but takes place in your home or office. It is considered the most comprehensive type of audit.

Gather Your Documentation

Once you have determined what information the IRS is seeking, it’s time to begin gathering your paperwork. If the IRS is challenging a particular deduction or tax credit that you claimed, gather whatever documentation you have to support your claim. This should include any related bank statements, receipts and invoices. Provide as much information as possible about the inquiries the IRS has made.

Do Not:

  • Volunteer information the IRS has not specifically requested.
  • Send your original documents.
  • Fail to make photocopies of all documents and correspondences.

Do You Need Professional Representation?

For a correspondence audit covering only one or two simple inquires, you probably don’t need a tax pro. But if you are among the 60 percent of Americans who hire pro to prepare your tax returns, the same preparer should respond to an IRS correspondence audit. Even if you prepare your own returns, having a professional from Optima Tax Relief check out your response before you return it to the IRS may save you from making a costly error.

If you have been contacted for an in-person interview audit or a field audit, the IRS allows you to be accompanied by a representative. Take advantage of this opportunity. You’ll likely be nervous during the procedure, and may share information that might prompt the IRS agent to probe beyond the original scope of inquiry. Not only that, most IRS agents prefer dealing with a professional.

Additional Tax Topics:

The IRS Criminal Investigation Process
IRS penalty and interest rates