Tax deadlines are fast approaching, but even when April 15 has passed, and you think it’s all behind you, the audit season begins. Chances are; you will never have to go through the process of an audit. Less than 1% of filed returns are audited each year and with Federal budget cuts that percentage is expected to be smaller this year. There are a couple of main categories that do see a higher percentage of audits. An income level of $200,000 or higher will raise your risk of an audit. Self-employment also can increase the risk, usually because of the increased number of itemized deductions used by self-employed filers. If you do get that letter from the IRS in the mail, follow these tips on surviving your audit.
It’s not the end of the world and it might not even be a big deal. Your correspondence from the IRS will specifically mention what part of your return is being audited. Full general audits of the whole return are rare, most audits are for a specific deduction you used or for a source of income you did not include. Read your notice carefully and make sure you understand exactly what issues they are looking at.
Understand the Process
This is critical and will also help you to relax and not be afraid of the process. Despite common perception, the IRS is not out to get you. They aren’t planning to string you up by your toes until you confess. There are three main types of audits they may perform; correspondence audits, office exams, and field exams. The most common audit is the correspondence audit. This will happen almost exclusively through the mail. Almost 80% of audits fall into this category and usually just mean that the IRS wants some additional information or documentation.
The office exam is when you are asked to come into an IRS office to meet with an auditor. These interviews usually last under four hours. The field exam is the most aggressive. This involves an agent or auditor meeting with you in your home or office. Expect to have hours of questions and be required to produce verifications. Most field exams are used to gauge your relative standard of living.
Be Honest and Polite
Always answer questions honestly, do not attempt to lie or cover up anything. If they have caught you doing something wrong, pay the owed taxes and any fine and move on with your life. Don’t offer extra information. Try to answer all the questions with a yes or no. If the question requires a more detailed answer, be succinct. Never volunteer information during an audit. This can only open up the door to more questions and perhaps widen the scope of the audit. Also, giving too much information can muddy the waters and make the audit last longer. Get in and get out. Don’t offer any extra paperwork and never bring returns from previous years into the audit as this can open the door for them to audit those returns as well.
Understand the Consequences
Relax. The IRS almost never seeks to pursue a criminal case. Only taxpayers (or tax-avoiders) who deliberately set out to defraud the IRS can expect to end up in prison. Making a mistake on your taxes, or even a little tweaking of the numbers will not see you behind bars. If the IRS does decide that your return was flawed, for the most part, you will just end up paying them the taxes owed, with interest. At times, they may assess a 20% fine if they determine, the errors on your return were willful.
Get your Paperwork in Order
Don’t show up for an audit with shoe boxes of paperwork all mixed up and expect the auditor to organize it. Remember, it is your responsibility to prove that your deductions were correct. The burden of proof is on you, not them. Organization will make the audit progress smoothly and will give the auditor the impression that you are a capable person. Make sure you have everything with you that you need, including sales receipts, proofs of payment, canceled checks and your mileage logs if you used that deduction. Bring originals and copies of all documents. Never let the IRS retain the original documents. If any paperwork is lost while in their possession it is still your responsibility. If you don’t have copies, ask the agent to make a copy and return the original to you.
Fill in Missing Records
If you can’t find necessary records, return to the source to get copies. Your employer, even previous employers, can provide copies of your payroll information. Contact credit cards to get statements reprinted. Any place you have done business with will most likely have copies of important paperwork for the last three years.
Keep Cool and Act Professionally
Just as you expect the auditor to act like a professional, do the same yourself. The auditor is much more likely to progress through the paperwork promptly if you are calm. Never get upset at the agent, remember they are people too. Even if the agent acts inappropriately, keep your calm. Yelling and arguing will never help you; it will only hurt you. Don’t ever respond aggressively or threateningly towards the auditor, they are federal employees, and you will be prosecuted if you lay a hand on them or even threaten to. Put yourself in their shoes, would you be willing to consider the taxpayer’s position if they were screaming at you?
Delay, but Don’t Let Them Delay
If you need more time to prepare your paperwork, ask for it. Any reasonable requests for more time will be granted. If an auditor asks for information that is beyond the scope of the original issue being investigated, ask for an extension to prepare that paperwork. However, if the IRS asks you to waive the Statute of Limitations, say no! The IRS has only three years from the date a return was filed to conclude any audit.
Consider Hiring a Professional
A tax professional can help streamline the process and will know when an auditor is grasping at straws or trying to string things along. Waiting until after an audit is over to consult a professional is a mistake. Once the IRS finds you were in error, it is much harder to get them to change their decision. A tax professional should definitely be consulted if the IRS requests a field exam as the tax professional can handle the matter in his or her office.