One of the scariest things in finances is the tax audit. We all like tax refunds, but no one wants to be audited. However, consumer tax guide publisher J.K. Lasser points out that more than 1 million taxpayers are audited each year. When you consider the tens of millions pay taxes, you realize that chances are good you won’t be audited. However, it is still possible that you will be chosen for a tax audit. In some cases, it is only a matter of sending in some bit of documentation that is missing. Other cases, though, require a little more attention. Here is what you can do if you are audited:
Know Your Rights
First of all, it is a good idea to know your rights. IRS Publication 1 offers a list of your rights, so that you can understand the treatment you are entitled to. Generally, there is a three year statute of limitations for auditing a tax return (although in some cases the IRS can audit beyond that). Here are some other things to keep in mind about a tax audit:
- You can schedule the meeting for the audit at a time — and in a location — that is convenient for you. Some recommend that you avoid going through an audit at your home or your place of business.
- You do not have to discuss issues not related to the tax issue in question by the audit.
- It is possible for you to reconstruct receipts or documents that are missing.
- If you are unsure or uncomfortable, you can ask for a recess during the audit so that you can consult with a professional.
- You can complain to the auditor’s supervisor.
- You have the right to be represented by a tax professional.
- If you don’t like the outcome of the audit, you can appeal to the Tax Court.
Preparing for Your Tax Audit
It is best to be prepared for a tax audit. Make sure you understand which issues are in question, and review the contents of your tax return so you are familiar with what will be addressed during the audit. Then, gather the documentation you need to back up your claims of deductions or credits.
Remember: You do not have to address issues that are not specifically listed in the official IRS audit. Do not bring extra documentation along, and do not volunteer any information that is not specifically asked for. There is no reason to lie, of course, but you also do not want to provide superfluous documents or statements that could lead to further investigation.
If you want to record the audit for your own records, you will need to let the IRS know 10 days ahead of the interview. Realize that video recordings are not allowed. An audio recording, might be a good idea though.
During the Audit
Be polite, and try to remain calm. If you are questioned on an item that is not included in the notice, calmly and politely decline to answer. The IRS must file a formal request for extra information. Make sure you have the phone number to your tax professional handy so that you can call a recess and confer if necessary.
If the auditor begins to make allegations of tax fraud, it is definitely time to request an end to the interview and seek the help of a tax professional or attorney.
For most people, a tax audit isn’t terribly long or painful. As long as you keep good records related to the deductions and credits you claim, you should be fine. It’s a good idea to make copies of documents in question, and keep the originals in a safe place.
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Thanks for the tips on what I should do in the event that I am chosen by the IRS for a tax audit. I’m glad you mentioned reviewing the contents of the tax audit to be familiar with the things that are to be discussed, as well as knowing which ones you can refuse to talk about, especially if it’s not part of the official IRS documentation. If I was in that position, I think I would be more comfortable if I had a consultant to help guide me through the entire process of tax auditing.
Recently went through an audit with the IRS. The original return had been completed by my accountant but I was not going to have him do the audit process for me because in my conversation with him about a few of the items, I got the feeling that he hadn’t even looked at the original return very closely. Bottom line – it was my money at stake and my record and no one would care as much as i did about it. The whole process was done by phone, fax and mail and took about 9 months and several ‘clarification’ letters. The end result was that their were no adjustments made to the original tax return. It was a lot of work and a lot of time spent on this but once I took on the ‘momma bear’ approach to the money, nothing was going to stop me!
I’m with Marci. I was audited once; my CPA did everything, I never talked to anyone at IRS. She handled it all, I owed nothing more.
I was audited once. Had a small inheritance and gave a lot more to charity. They just asked for a clarification and I had the receipts. Two letters and it was over. Very painless. Think the above advice is the best. Deduct what you have receipt for.
Marci, I like your tip. Sounds like the way to go.
Thanks. Been there, done that. Once you “win ” a couple, the IRS seems to go elsewhere 🙂
I was audited twice over 25 years ago. I suspect my CPA was on a IRS watch list. I talked to my friend who was a former IRS Prosecutor. He said it was probably routine and talk as little as possible. These auditors count on you saying something that will reveal a mistake. Some other advice was to never go yourself, because you can not say I will have to ask my clients. You will have to answer whcih could get you in trouble.
Just call your tax man, sign the paper for him to represent you, send in the papers he requests, and go on with your life. The tax man and the IRS man will figure it out, and you will not have to go thru the stress. It’s one of the benefits of having the same tax man/company do your returns for 30 years…. they know you inside out and can handle whatever comes up. The IRS does not like to deal with my tax man -= the IRS has had to refund me more every time they have audited me…. 🙂
My personal policy is to only claim on the return what I have documents for. If I know there was a medical bill, but don’t have a receipt, I won’t deduct it if I can’t get another copy from the doctor, for example. An accountant once told me you don’t have to have receipts for donations less than $250, so if lose them, I just estimate. But I rent out my condo, so since that’s considered a business, I have to be careful with taxes and keep records of everything, just in case.