Tax season is over, you’ve received your tax return, but you’ve just received the dreaded audit letter from the IRS. While it can feel stressful, there’s no need for alarm. Many Americans go through this process every year. In 2018, nearly one million taxpayers were audited by the internal revenue service for their individual returns. So how should you approach the situation? While user experience will vary, here are 10 pointers to help you survive an IRS tax audit.
10 tips to help you survive any audit
To get through an audit, keep calm and follow these 10 tricks to protect yourself and your tax return from an auditor.
First, the chances of being audited by the IRS are lower than ever. In 2018, the odds of your tax return being audited were less than 1%, so the chances of holding onto your tax return are high.
1. Determine what type of IRS audit you’re facing
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.
Before deciding what steps to take, understand what kind of IRS tax audit you’re facing. The three types include:
The most common and least concerning 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.
The second 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. During this, an IRS agent comes to your place of business to examine your records and taxes. This is the least common type, as it is more time-consuming for the IRS. In 2018, about 25% of tax returns audited were this sort of audit.
If the IRS requests a field audit, it may be a good idea to consult a tax relief professional.
2. Respond on time to avoid additional tax problems
Typically, you have 30 days to respond to an audit notice. If you don’t respond to the audit notice on time, you risk losing your right to dispute the IRS’ claims and will have to pay whatever additional penalties the IRS deems necessary.
3. Prepare your documents
When you receive an audit request, it will list out all the documentation that’s needed. Be sure to find all of the tax forms required to resolve the issue. If you had a tax preparer do your taxes on your behalf, be sure to reach out to them before sending your documents to an auditor. Documentation requests can include previous tax returns, receipts, brokerage statements, proof of income, w 2 paperwork, and more.
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 provide 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.
4. Consider representation
When facing an audit, you have to right to represent yourself. However, remember that you are proving your case to the IRS auditor in their field of expertise. No matter how many tax tips you read, the tax code is 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. A tax attorney normally has plenty of experience in tax court, specializes in tax laws, and represents many clients.
If you owe lots of money to the IRS, it can help to have a tax relief company on your side. The best tax relief companies have a tax pro or enrolled agents on staff, provide a money-back guarantee and charge competitive rates. Check out which tax relief company is the best fit for you.
5. Know your rights
You are entitled to fair treatment. However, you need to know your rights to ensure that you get the treatment you deserve. 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 of income or tax fraud on your return.
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’s 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 disagree 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 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 reasons can trigger an audit, including the following reasons:
- Holding foreign bank accounts.
- Making transactions in a foreign currency.
- Claiming rental losses.
- Home office deductions or business deductions.
- Business use of a vehicle.
- Audits of business partners you are connected with.
- Your return doesn’t follow the “norms.”
- Aggressive business deductions.
- Income discrepancies.
- Having a large amount of income.
- Having write-offs for a hobby.
- Formerly having tax debt.
Note that an audit request doesn’t imply suspicion of criminal activity. It merely seeks clarification to confirm accuracy.
How do I prepare for an IRS audit?
Follow the tax tricks 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, you will find yourself in an undesirable situation. The IRS can assess new taxes and attempt to collect them. This can lead to liens and levies.
How long does an IRS correspondence audit take?
An IRS correspondence audit usually takes three to six months to complete from when you receive the notice. You can speed up the process by responding to audit letters promptly.
Get professional help with an audit
No matter which way you slice it, being audited isn’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 audit tricks, you’ll have no problems surviving an IRS audit.
To streamline the process and protect yourself, you can hire a tax expert to consult or represent you. Review and compare leading firms below to find the best one for your situation.
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.