Getting a notice that you're being audited by the IRS can strike fear in the hearts of the bravest of taxpayers. However, educating yourself and following a few simple rules can make the process less painful.
Kinds of Audits
Some audits are worse than others. You can expect either:
- A correspondence audit where everything is done by mail. The IRS asks for a straightforward answer on less complicated issues, such as proof of deductions, and you mail back your answer
- An office audit, held in a local IRS office. Here you'll be asked to produce receipts and other documents related to specific questions about your return, or
- A field audit, where the IRS agent comes to your home or place of business
Producing Financial Documentation
The IRS has the right to look at your financial records to see if you've reported your deductions, exemptions and credits accurately. But it's to your advantage to:
- Ask questions of the IRS agent ahead of time to make sure you understand exactly what the IRS is looking for
- Provide only the documentation you're being asked for and nothing more
- Organize the paperwork you give to the IRS so the audit agent doesn't have to go looking through stacks of unrelated documents where he may find something else that needs auditing
- If you're missing receipts or other documentation, try to reconstruct the information as best as you can, based on other documents, like canceled checks
Preparing for an Audit
There's a lot you can do ahead of time to get ready for an audit:
- Talk to a tax attorney or certified public accountant to understand what the IRS is looking for and why
- Thoroughly read IRS Publication 1, known as the Taxpayers' Bill of Rights. You should have gotten a copy along with the notice of audit from the IRS
- Research the problem on the IRS web site
- Discuss the situation with the professional tax preparer who helped you with the return(s) in question, and decide whether he should be at the audit with you
- Don't hesitate to ask for a postponement of the audit if you need more time to round up records
During the Audit
Many lawyers advise having a lawyer or certified tax professional represent you during the audit instead of going by yourself.
If you're going to the audit:
- Don't volunteer information of any type
- Answer questions as concisely as possible
- Don't lie
- If you sense things aren't going well, don't hesitate to stop the audit to consult with a tax attorney or accountant before continuing
- Ask to speak with the audit agent's supervisor if you think he isn't being fair
The IRS must complete an audit and give you an examination report within three years of the time you filed the return.
After the Audit
Most people owe something after an audit. If this happens, there are things you can do if you can't afford to pay the entire tax bill all at once or if you don't agree with the auditor's decision:
- Meet with the auditor and/or his supervisor to discuss the process and results and see if they're willing to bend a bit to avoid an appeal or reduce the amount you owe
- Ask about a monthly repayment plan that fits your budget
- Appeal the audit results to the IRS Appeals Office
- Take an appeal in Tax Court
Appealing your case within the IRS or the Tax Court will often net you some savings (although seldom a complete victory) and buys you time to figure out how you'll pay the ultimate tax bill. Unfortunately, interest continues to build on the amount owed while you're appealing. Also, be aware that an appeal within the IRS may uncover issues not spotted by the initial auditor. So, another audit is a real possibility.
Instructions for appealing an audit result should come with the examination report, but you can also find this information at your local IRS office.
Questions for Your Attorney
- I received a notice from the IRS, what should I do?
- I lost some of my receipts for items I claimed as deductions. Can I use bank statements to prove I purchased the items?
- What information do I have to give to the IRS field agent?