A tax audit is an accounting procedure under which the IRS examines your individual or business financial records to ensure you filed your tax return accurately. If you prove that your initial return was complete and correct, you won’t be asked anything further, but if the IRS finds errors or purposeful mis-reportings, you’ll have to pay the recalculated return amount and any interest penalties.
Being under audit can be a nerve wracking situation. If you’ve found yourself in the scope of an IRS audit, take the following measures to make the audit process as painless as possible.
Contact a Tax Lawyer
The first thing you should do if you are being audited, is secure the services of a tax lawyer to help you navigate the process. Tax laws and filing regulations are a maze of red tape and confusion, and often change from year to year.
IRS Audit Attorneys are well versed in navigating this maze. They are also able to give you the safety-net of attorney client privilege, unlike a CPA. In fact, a CPA can even be made to testify against you in IRS audit proceedings.
Determine Your Return Was Selected For An Audit
While the IRS is supposed to notify you as to why your return was selected for audit, it’s up to you to ask. Your taxes can be audited for a variety of reasons, including:
Specific activity on your return, such as cash wages, 1099 and W-2 forms that don’t match your reporting, high deductions relative to your income, reports inconsistent with previous years, etc.
Related examinations, where your report involves transactions with someone else being audited
Automatic flags, where computer programs find outlying “scores” on returns (ex: above average withholding)
All IRS Notices or Letters contain a notice number in the upper right-hand corner. These numbers will further inform you about the specific issue(s) with your tax return. Once you know what you are being audited for, you can narrow your focus and start gathering relevant documents.
Gather Your Documents
Once you know why you are being audited, and what is expected of you, you can start poring over your records to find relevant receipts and documents. Never send in your original documents or your only copy, and never send in more than is requested. If you can’t find relevant documentation, immediately request duplicates, since the auditors won’t accept the excuse that records are missing or lost.
Once you have all your copies and originals, get them organized, especially if you are facing an in-person audit. Good organization shows the agent that you are a responsible taxpayer, and may result in the agent limiting the scope of their investigation.
Here are Some Basic Rules to Follow If you are Being Audited:
Prior to the audit, it is important get organized. Gather all the records you used to prepare the tax return(s) being audited.
Provide only the documents needed to support the point under discussion. Never give the auditor more information than requested.
Only answer the questions you are asked in a concise and direct manner. Provide succinct answers, and always respond honestly and briefly. If you’re unsure of how to answer a question, make a note of it and offer to get back to the agent with answers.
Never give the auditor original documents, only copies. Make a list of everything you submit.
Don’t chit-chat or exchange casual conversation. Each comment you make gives the auditor more information about you. But also keep cool and stay calm. Never be argumentative, stubborn or belligerent.
Follow the above tips to avoid prolonging the IRS investigation. In some cases, you may be eligible to file an offer in compromise. An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS will accept your OIC if you convince the agency that:
– you aren’t able to pay the full amount in a reasonable time, either as a lump sum or over time through a payment agreement
– there is doubt as to the amount of your tax liability
– due to exceptional circumstances, payment in full would cause an “economic hardship” or be “unfair” or “inequitable” for example, you can’t work due to health problems, or you’d be left with no money to pay your basic living expenses if you sold your assets to pay your tax bill in full.
Collection of unpaid taxes can include the IRS applying any tax refunds to your unpaid tax bill, garnishing your wages or seizing your property and assets.
You should always pay the tax owed in full as quickly as possible. If you need time to complete your payment, you can apply for an installment agreement, which can be set up with the IRS online, by phone or by mail.