What to Do if the IRS Audits You

Most taxpayers dread the thought of a tax audit. The majority of audits, however, are conducted by mail, and your involvement will be limited to supplying documents requested by Internal Revenue Service auditors. It is true that most audits result in the taxpayer paying additional taxes, but if you were truthful when you prepared your return, it is unlikely the IRS will make you pay a harsh penalty. 

Preparing for Your Audit

If you receive a letter from the IRS informing you of a tax audit, read it carefully. The letter will include information on why your return was selected for audit, specific instructions you must follow, and a deadline for responding. Taking the following precautions will also help you successfully navigate the audit process:

Be ready. Research tax law as it pertains to your audit. Consider consulting an attorney. Give your accountant a call and look through the Taxpayers' Bill of Rights so you know what your rights are. Even during the audit, don't shy away from requesting a recess to consult your tax counsel.

Don't rush. Postponing the audit by requesting additional time when you need it to organize documents and records can work to your advantage.

Go to the IRS. If possible, go to the IRS office for the audit instead of meeting at your business or home.

Back up large deductions. If you have claimed substantial deductions on your return, you must assume that the IRS will require you to provide some evidence of them. This evidence can include such items as canceled checks, invoices, receipts, bank records, insurance reports, and even photos.

Consider the statistics. Fewer than 25% of taxpayers who are audited avoid paying additional taxes. Know that the odds are against you and consider negotiating with the auditor to limit damages.

This is not the time to volunteer. Avoid giving the auditor more information than what is requested. There is no need to give copies of other years' returns or to hand over documents that don't relate to the audit.

Appeal. When you receive the examination report, you can call the auditor with questions and ask for an explanation of the results. You have the option to appeal within the IRS or go on to tax court. 

Avoiding Audits: Don't Give the IRS a Reason to Audit You

The best advice when it comes to handling an IRS audit is to make sure you are not audited in the first place. Most audits are conducted when examiners find something in your tax returns that indicate there are problems with it. Taking the following steps should help keep your returns from being flagged for audit.

File online or use tax preparation software. Modern tax software is remarkably good at ensuring that you provide the IRS with all of the necessary information because it will often prevent you from filing without it. Additionally, most software will point out entries on your return that may trigger an IRS audit so you can double-check them to ensure they are accurate. However, filing using an electronic format does make it easier for the IRS to review your return.

Beware of the Schedule C. Filing your income tax with Schedule C, Profit or Loss for Business, will catch the eye of auditors. Consider reporting your income from the small side as "other income" on your Form 1040, U.S. Individual Income Tax Return.

Facing an IRS Audit? An Attorney Can Help

An IRS audit can be a complex, confusing process that most taxpayers are ill-equipped to handle without assistance. An experienced local tax attorney can help guide you through the audit process, advocate on your behalf, and ensure that your rights are protected.