So, you have received the dreaded tax audit notice from the Internal Revenue Service and your stress levels are through the roof. While this reaction is understandable, it won’t help you deal with an impending audit. While no strategy can completely eliminate the pain associated with an audit, knowing what to do – and what not to do – can help you minimize an audit’s adverse impact. The strategies described below are intended to provide general information about the tax audit process and should not be used as a substitute for legal or professional advice pertaining to your specific tax circumstances.
Read the Tax Audit Letter Carefully
The IRS informs taxpayers of impending audits either by mail or by telephone followed by a mailed notice. If you receive an email message claiming to be an IRS audit notice, there is a 100 percent chance that the message is a scam, and you can safely ignore it. On the other hand, if the message appears to be legit but you are uncertain of its authenticity, contact the IRS to either confirm or disprove your suspicions.
Once you have determined that you are indeed being audited, read the letter carefully. Verify what type of audit you are facing: correspondence, office, field or Taxpayer Compliance Measurement Program (TCMP). The letter should also list precisely what documentation the IRS is seeking along with any relevant deadlines.
Gather The Requested Documentation
A good rule of thumb to follow when dealing with an IRS tax audit is to provide all the documentation that is requested, but no more. If the notice is asking for tax returns and paperwork for the past two years, don’t also offer paperwork for the past three years. If the audit notice requests documentation to support your home office deduction, don’t offer proof that the business trip you took to Las Vegas was legit. You should also never, ever send originals or your only copy of any document.
Consider Legal or Professional Representation
If you are only asked to supply documentation for a correspondence audit, chances are you really don’t need professional representation – unless you cannot provide the documentation that the IRS is seeking. Nonetheless, it can’t hurt to have an attorney or certified public accountant look over your response before you mail it in. If you must attend an office audit, legal or professional representation is allowed and may be advisable. If you are being subjected to a field or TCMP audit, obtaining legal or professional representation is strongly recommended.
Minimize the Pain
Provide the documentation that has been requested in a timely manner. Respond promptly to correspondence and show up for scheduled sessions on time. If you need more time to obtain requested documentation, be aware that delays may prolong the audit process.
If you have not filed your tax return for the present year, avoid doing so until after the audit is completed. Otherwise, your current year’s return may also be subject to audit, which may prolong the process. Instead, request an extension if the correspondence audit arrives or an in-person audit is scheduled before the tax filing deadline date. If the audit has not concluded by the expiration of the extension, pay any taxes that you believe you owe with a letter stating that the payment should be applied to your tax obligation for the current tax year.
If the tax audit drags on, the statute of limitations may expire. In most cases the statute of limitations is 3 years from the date the return in question is filed, or the date when the taxes for the return in question were due, whichever is later. Note that the statute of limitations doubles (6 years) if you didn’t report 25% or more of your income. When the statue of limitations on a tax audit ends, the IRS may request to extend it for the audit. You are not required to comply, but refusing the request means that the agent will make a determination based on the information he or she has, which may or may not work out in your favor.
You’ll Get Through It
It cannot be stressed enough – panic when facing the prospect of an audit is never constructive. What’s more, it’s not necessary. Although the audit process can be painful and costly, for honest taxpayers the chances of facing criminal charges are very slim. And if the audit reveals that you do owe a significant amount of money, you can work with the agent to devise a payment arrangement you can live with.