Few events inspire more dread than an IRS tax audit. Even if you're confident you've accounted for every cent of income and only taken legitimate deductions, it's hard not to worry what a close examination of your tax returns might uncover – not to mention the time spent tracking down old records.
Here are a few pointers to help allay your fears and better prepare in case you should ever get chosen for the dreaded IRS audit:
There are three basic types of IRS audits:
- Correspondence audit, which is conducted entirely by mail. You'll receive a letter from the IRS asking for additional information about specific items on your tax return.
- Field audit, where an IRS agent comes to your home or business to examine records and observe where you work.
- Office audit, where you must be interviewed at an IRS office.
According to Chris Kollaja, a certified public accountant and partner at A.L. Nella & Company in San Francisco, California, if you're having a correspondence audit and you feel your records are too voluminous to mail, you can request a face-to-face audit.
"You can also ask a representative, such as your accountant, tax preparer or lawyer, to help prepare for the audit and even attend it in your place, if allowed," says Kollaja. "An experienced tax professional can tell you what to expect, guide your responses and keep the audit on track should you get tongue-tied or start sharing more than is necessary."
The chances of being audited are low. "Sometimes returns are randomly selected for audit, but more often it's because something jumped out in the computer analysis each return receives," he explains.
Common items that might trigger an audit:
- Taxable income listed on your return doesn't match amounts W-2 or 1099 forms, 401(k) plan or IRA distributions, brokerage accounts, etc.
- Taking above-average charitable deductions relative to your income.
- Deducting business meals, travel and entertainment.
- Claiming the home office deduction.
- Failure to report foreign bank account assets.
- Concealing cash income or receipts.
- Excessive cash transactions over $10,000.
- Your close relationship to another taxpayer being audited.
- Someone reports suspicious activity by you (the IRS offers a Whistleblower Award).
Kollaja recommends several ways to prepare for and attend an audit:
- Respond to the IRS within the stated deadline – usually 30 days.
- Organize paperwork and receipts pertinent to the issues they've identified.
- If you won't have everything ready in time for the audit, contact your auditor to discuss whether it can proceed anyway, or if they'll agree to postpone it.
- Bring or send only documentation requested in the initial notice. At an in-person audit, keep you answers brief and don't voluntarily provide information that could launch a fishing expedition.
- If the examiner questions you on an item not mentioned in the initial notice, you're allowed to ask for additional time to fulfill additional requests.
- Never give original receipts to the IRS agent – they are not responsible for lost paperwork.
- You're allowed to make an audio recording of the audit provided you sent your agent written notice 10 days before the appointment. Video recordings are not allowed.
- Always be polite. Acting belligerent or evasive can only hurt your cause.
Kollaja suggests reading IRS Publication 556 to learn more about how the audit process works and reviewing the section on itemized deductions in Publication 17, both available at www.irs.gov.
Bottom line: Think positively – you might even come out of the audit with a tax refund – it happens.