Dealing with the IRS During a Personal Tax Audit

About 1 percent of taxpayers face an Internal Revenue Service (IRS) audit of their individual tax return each year, according to a 2013 Fox Business report. Those in higher tax brackets have a greater chance of being audited, but the chances are still low that you will be chosen.

If you do receive a dreaded letter from the IRS, stay calm and understand that the analysis is a professional procedure that may be resolved by simply presenting the correct paperwork.

Knowing what to expect can assist you in promptly addressing errors, handling numerical discrepancies, communicating respectfully with IRS agents and completing the process with only a moderate level of stress.

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Why the IRS May Contact You

Taxpayers should understand that an audit in no way implies suspicion of criminal activity. Tax returns are complicated documents carrying financial data that must be evaluated to confirm accuracy.

The audit process is known as an examination and does not imply that you have intentionally made an error. The IRS contacts individuals for a variety of reasons, in fact.

Many tax returns are chosen based on random sampling and income document matching. Some are chosen based on other factors like income or unusual deductions.

Other reasons you may be audited:
  • Conflicting third-party reports regarding income on 1099s or W-2s
  • Home office deductions
  • Rental losses
  • Business use of a vehicle
  • Hobby-related deductions (also known as hobby losses)
  • Foreign currency transactions or bank accounts

Preparing for an Audit

If you are being audited, the IRS will contact you by mail or telephone, not by email. Included in the notice will be the specific information that is to be examined and what supplementary documents you may need to present.

You have 30 days to respond to an audit notice. Do not put off your response, as the time you spend ignoring a letter can be time that interest builds on the amount you owe the IRS.

Routine errors from incorrect math or missing paperwork are often handled through correspondence.  More than three-quarters of audits are completed through the mail, according to news reports. Tax returns requiring more attention are handled by an IRS agent.

Before an audit, you need to get your paperwork ready, seek to understand what the problem is and determine if you want representation.

Gather the forms the IRS has requested. You will want to make sure you have copies, not originals. Organize your paperwork, and make sure the documents you have match up with the year that is under audit. If you realize you have misplaced certain records, immediately call and request that duplicates be sent to you.

Documents you may be asked to bring can include:
  • Home mortgage statements
  • Previous tax returns
  • Receipts
  • Brokerage statements
  • Retirement account records
  • Pay stubs

You may want to contact a tax professional to review your documents and make sure you understand what the discrepancy might be. If you completed your taxes at home using an online filing service or through a tax compilation company, the company may provide an audit defense service for a fee.

During the Appointment: Know Your Rights

For the actual appointment, you can attend by yourself or opt for representation to attend in your place or alongside you. It may be costly, but a certified public accountant (CPA), attorney or IRS Enrolled Agent or paid preparer of your return can represent you.

During the audit, which will take place in person at an IRS office or at your house, you should be polite and compliant. Only show the IRS agent documents that are specifically requested.

At the same time, you have rights and deserve fair treatment. Here are your taxpayer rights during the audit process, according to the IRS:
  • A right to professional and courteous treatment by IRS employees.
  • A right to privacy and confidentiality about tax matters.
  • A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
  • A right to representation, by oneself or an authorized representative.
  • A right to appeal disagreements, both within the IRS and before the courts.

After the Audit

An IRS audit may end with no changes, an agreed-upon change or changes that the taxpayer disagrees with and appeals.

After the interview, the examiner will present you with a computer-generated audit report, which will include the amount of additional tax that is assessed, an explanation of how your return will be changed, options for how you can appeal the report and a space that indicates whether you consent or disagree. Signing the report means you are giving up your right to go to Tax Court.

If you are unsure whether you agree with the report, you do not have to sign it. You can request to speak with the agent’s supervisor to review the documents further. You can appeal the decision after this, request assistance from the Taxpayer Advocate Service and go to court if necessary.

If you agree with the report, you will have options for when to make your payment. You can request a monthly installment plan if you cannot afford the payment.

Any tax deficiency will accumulate interest at a rate of 9 percent per year from the date of the original return until you pay the bill. The interest is compounded daily. The IRS examiner will often have this information prepared, showing the total you owe.

Based on the type of errors discovered during the audit, you could also face a penalty of up to 75 percent of the deficiency, and, for severe cases, possible imprisonment.

Protect Yourself in Case of an Audit

Simply keeping all of your paperwork can prepare you for a possible audit.

Here are some basic steps to keep your records in order:
  1. Keep tax returns and records for three years.
  2. Save your checkbook registers.
  3. Organize receipts by date for major purchases.
  4. File bills in folders.
  5. Journal and keep evidence of deductible information.
  6. Keep tax documents in one location.

In addition to knowing where all of your documents are, take the initiative to compare your tax liability to the national average in your occupation. Having an idea of how much you should pay in taxes can guide you in evaluating if your taxes are properly complied. Sometimes double-checking for accuracy can help you avoid a lengthy, and sometimes costly, process.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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