Have you received the dreaded audit letter from the IRS? While it can feel shocking and stressful, like getting called to the principal’s office, there’s no need for alarm. Many Americans go through audits every year and make it out fine. In 2018, nearly one million taxpayers underwent an IRS audit of their individual returns. So how should you approach the situation? Here are 10 tax audit tips to help you survive your upcoming audit.
10 tax audit tips to help you survive any audit
Need help getting through an audit? Keep calm and follow these 10 tax audit tips to protect yourself (and your bank account) from an audit.
First, some good news. The chances of being hit with an IRS audit are lower than ever. In 2018, only 0.5% of tax returns were audited.
1. Understand the type of audit
Before you can decide what steps to take, you must first understand which type of audit you’re facing. The three types include:
The most common and least concerning audit is a correspondence audit, which is completed through the mail. In the 2018 fiscal year, about 75% of audits were performed via correspondence. These are commonly performed in response to mild discrepancies on a tax return, like missing paperwork or math errors.
The second audit type is an office examination, which is typically scheduled at a local IRS branch. In an office audit, an agent looks through your documents to ensure all of the information is reported accurately.
The third and most extensive type is the field audit. In a field audit, an IRS agent comes to your place of business to examine your records and files. This is the least common audit type, as it is more time-consuming for the IRS. In 2018, about 25% of tax returns audited were field audits.
If the IRS requests a field audit, it would be wise to consult a tax professional.
2. Respond on time
Typically, you have 30 days to respond to an audit notice. Be sure to do so within that time period. If you don’t, you risk losing your right to dispute the IRS’ claims — you’ll simply have to pay whatever additional tax, interest, and penalties the IRS deems necessary.
3. Prepare your documents
When you receive an audit request, it will list out all the information and documentation that you’ll need to present. Be sure to dig up all of the documents required to resolve the issue.
Documentation requests can include previous tax returns, receipts, completed IRS forms, brokerage statements, pay stubs, home mortgage statements, and more.
Make sure you have all the information that the IRS requests, and remember to make copies for your records.
4. Consider representation
When facing an audit, you can represent yourself and may have no problems. However, remember that you are proving your case to the IRS agent in their field of expertise. No matter how many tax audit tips you read, tax code is still complicated. For the average taxpayer, it can seem like a foreign language.
If you’re feeling overwhelmed, it may be in your best interest to have an expert on your side. You can hire a tax attorney, CPA, or enrolled agent to represent you and level the playing field.
5. Know your rights
You deserve and are entitled to fair treatment. In order to ensure that you get it, it’s smart to know your rights. You have the right to:
- Professional and courteous treatment by the IRS agent.
- Privacy and confidentiality
- Clear explanations.
- A fair calculation of what is owed.
- Challenge the IRS’s position.
- Appeal IRS decisions.
- Know how much time you have in situations.
Read more about the rights of taxpayers.
6. Know the statute of limitations
As a general rule, the IRS only has three years to complete an audit on a tax return. Ensure that they are within the allowed time period. However, note that this time limit doesn’t apply if the IRS finds significant underreporting or tax fraud.
7. Answer the IRS’ questions
When in the audit, it’s best to simply answer the questions you’re asked. Dodging questions will only make you seem suspicious.
Likewise, providing any additional (unasked for) information can also create problems for you. The auditor is not your friend — there’s no need to make conversation. Simply bring the requested documents and answer the auditor’ questions, and you should get through the audit with no issues.
8. Be professional
It’s best to take the audit seriously. Show up on time, dressed professionally, and with your documents in order. If you can’t make it at the initial time and place, you can reschedule your appointment. However, be sure to reschedule for a time when you know you’ll be available. Repeatedly postponing your appointment can cause further problems.
By presenting your case professionally, you are more likely to get through the audit as quickly and painlessly as possible.
9. Negotiate tax issues
If you don’t agree with something the auditor says, speak up. Make your case and stand your ground. You shouldn’t compromise and be forced to pay because of a simple misunderstanding.
10. Contest the results
If you don’t agree with the outcome of the audit, don’t fret. It’s not the end of the road. You can contact the auditor for clarification or schedule a follow-up meeting to negotiate a compromise. If you still can’t come to an agreement, you can file an appeal with the IRS or can go to tax court.
While an audit doesn’t necessarily mean that you made a mistake or that you’ll owe money, it does put you on the defensive. Keep these 10 tax audit tips in mind to stay safe throughout the process.
Also, remember not all audits will increase your tax liability. In 2018, 8% of field audits and 10% of correspondence audits did not increase the tax liability of taxpayers. In fact, the additional tax liability obtained by audits has been in decline for some time.
Frequently asked questions about tax audits
Now that you know the tax audit tricks required to weather any audit, let’s answer some frequently asked questions.
Why would you be audited?
What triggers a tax audit? A variety of things can trigger an audit, including the following:
- Holding foreign bank accounts.
- Making transactions in a foreign currency.
- Claiming rental losses.
- Home office deductions.
- Business use of a vehicle.
- Audits of business partners, investors, or other taxpayers you are connected with.
- Your return doesn’t follow the “norms.”
- Aggressive deductions.
- Income discrepancies.
- Having a large amount of income.
- Having write-offs for a hobby.
Note that an audit request doesn’t imply suspicion of criminal activity or an intentional error. It merely seeks clarification to confirm accuracy.
How do I prepare for an IRS audit?
Follow the tax audit tips above. Basically, you need to understand the issue and make your case. If you don’t feel confident that you can represent yourself, hire professional help.
What happens if you don’t respond to an IRS audit?
If you don’t respond to an IRS notice of audit, you will find yourself in an undesirable situation. The IRS can assess new taxes and attempt to collect on them. This can lead to liens and levies.
How long does an IRS correspondence audit take?
An IRS correspondence audit usually takes from three to six months to complete. You can speed up the process by responding to audit letters promptly.
Get professional help with a tax audit
No matter which way you slice it, tax audits aren’t fun. However, as long as you have filed to the best of your knowledge, you likely have nothing to worry about. Even if you end up owing more than you originally calculated, there are payment plans that can help you through it. And if you follow these 10 tax audit tips, you’ll get through the experience unscathed.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.