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.
This post was featured in the Carnival of Personal Finance