Getting audited is no one’s idea of a good time, yet you can
minimize the stress if you take the right approach.
Step 1: Understand why and when. While
it’s possible you were selected randomly, it’s more likely you were
selected for a specific reason. One example might be if your deductions for
charitable donations or business expenses were greater than is typical for
your income or profession. Before proceeding, try to understand what is
being challenged and when you must reply.
Analysis: Your
chance of being audited rises along with the size of your income. With
$200,000 a year in income your chance of being audited nearly doubles
(1.01% in FY2016) compared with a person who has half that income. People
with more than $10 million in income have a nearly 1-in-5 chance of an
audit every year.
Step 2: Consider the type of audit. There
are three types of audits, in increasing levels of seriousness: a
correspondence audit, (conducted through the mail); an office audit (a
visit to the nearest IRS office); and a field audit (an IRS agent comes to
visit you). How you prepare will vary depending on the type of audit.
Analysis:
About 70 percent of audits are conducted through mail correspondence which
typically involves routine issues like providing information about
deductions. With proper documentation and prompt attention, they can be
relatively painless to resolve. Office and field audits can be trickier and
will involve more work and preparation.
Step 3: Gather documents. Once you’ve understood
the reason and the type of audit, gather and organize as much of your
relevant records as possible to prepare your response. For example, if the
audit is specifically about deducting vehicle costs for business use,
gather your mileage logbook, receipts and other supporting documentation.
This will help prove your case and let the IRS know you are a responsible
taxpayer.
Analysis: If
you do not have adequate documentation, you can try to get third-party
corroboration. For example, if you took charitable deductions but lost the
receipts, you could try reaching out to the charity for their records.
While the charity cannot create new receipts, they may have copies of
confirmations sent out to you at the time of your donation.
Step 4: Know your rights. You have rights to
ensure you get a fair chance to state your position. Specifically, you have
the right to clear explanations about what the IRS wants and their decision
regarding your case. You have the right to appeal the IRS’s decision. You
also have the right to have your accountant or lawyer represent you during
the audit. In addition, there is a special Taxpayer Advocate Service that
is available to help you navigate through problems with your case.
Analysis: While
you should stand up for your rights, always be polite with the IRS agent
assigned to your case. They are just doing their job and you aren’t doing
yourself any favors if you show hostility during your audit.
Step 5: Get help. No matter what, reach out
immediately if you get a letter from the IRS. It pays to have the right
help, because an experienced professional can guide you away from costly
mistakes. Too many taxpayers have corresponded with the IRS without this
help and have paid the price. Try as you might, you probably do not know
the tax law as well as the IRS.
Audits
happen. How you handle them can make all the difference. Please call if you
need help.
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