After a day at work, you come home and see an attractive letter from the IRS saying you are being audited. You do not now how to possibly handle the situation. How could you have avoided this? What do you do? And most importantly, what don’t you do?
While the IRS does conduct random audits of returns, most audits are anything but random. IRS computers assign each return a DIF score. The DIF score indicates a statistical likelihood, based on the IRS’s experience with other taxpayers who have similar incomes, similar expenses, and even similar preparers how likely the Service is to find an error in their favor—not yours. While it is not uncommon for an auditor to determine that you have overpaid taxes, the vast majority of audits result in a tax liability due to the United States.
- Review your tax forms and know what exactly they are auditing
- Call your CPA, tax preparer or tax attorney BEFORE the audit.
- Keep copies of every item you provide to the auditor.
- Organize your documents. Identify every document which supports your position, and separate the documents, if needed, to line up with every deduction or expense claimed. Highlight important information, and generally make the information as organized and accessible as possible.
- Request a receipt for any documents you provide to confirm that you provided them, when asked.
- Update your information (i.e. address, phone number, etc.)
- Be honest and sincere when answering questions
- Request for copies of every document you sign
- Know your rights
- Stay calm and composed
- Go it alone. You should call your tax preparer, CPA, or tax attorney (or all of the above) as soon as you find out about the audit.
- Assume that your audit was random. Look over your returns and try to take the mostaggressive position that the government may adopt when deciding whether to allow your deductions, or expenses.
- Try giving more or less documents to the agent.
- Give the IRS the only copy of a document you have on file. IRS handles millions of documents a year—when you consider how many files they have, it’s no wonder that documents get misfiled, misplaced, or lost.
- Try making small talk with the agent, it only makes you more susceptible to spilling more information than you need.
- Make jokes—of any kind. Assume that IRS auditors have no sense of humor.
- Ignore deadlines!
- Allow the IRS to come to your home or business. (Agents are trained to look for items that may have been expensed by business but placed in home)
- Allow the IRS to speak with employees of your business.
Tax audits can be a giant burden or a quick process depending on how you handle it. Although, you may think the odds of the IRS filing an audit against you are slim, in recent years, there have been improvements to the way the IRS can detect falsified or missing tax documents. Be prepared to prove your deductions. The burden of proof remains on the taxpayer to prove that they are entitled to deductions.