Are you facing a tax audit? Opening your mailbox and finding a letter from the IRS can bring a sweat to even the most confident people. While some letters are nothing more than informational letting you know you made a math error, those requesting an IRS audit are the most frightening.
You don’t have to worry about an audit, as long as you didn’t knowingly lie on your taxes. You can do some things, however, to make the audit go far smoother. The steps you take to prepare for the audit can make all the difference in the outcome and the amount of tension you experience.
Types of Audits
While small business owners and sole proprietors are more likely to be audited than other tax payers, some audits only questions a specific item on your tax return, such as a receipt showing you paid for books pertaining to your work and claim a deduction, or had medical expenses you deducted.
These types of request often allow you to conduct the audit by mail. In most cases, the IRS allows you to send a copy of the original receipt. Don’t send the original, because the mail can get lost and you’ll not have any backup later.
In some cases, the IRS only challenges a portion of your taxes, such as your business expenses listed on itemized deductions or even the section on automobile expense. In these cases, you don’t have to drag all your tax receipts along to the audit, simply taking those items that pertain to the area requested is all you need.
It helps if you not only take the receipts but also canceled checks or credit card bills from the expenditure. This is just another form of documentation to prove your case.
Be prepared to back up your reason for the deduction. If you’re a businessperson and attended a function in a party city, make sure you have proof that the function lasted the entire trip. Otherwise, you might find that you can only deduct a portion of the travel and stay.
Preparing ahead of time for any questions regarding the suspect deduction or credit can help the audit go smoothly and in your favor. Even if the IRS disallows the deduction, if the reason you deducted the expense is logical, you’ll probably avoid a penalty.
Recreate Your Tax Preparation
If you’re one of those unlucky individuals that have a full audit, a Taxpayer Compliance Measurement Program (TCMP), don’t panic. This is the most thorough of all audits and requires a verification of all data.
You might need other certificates besides just tax records for this type of audit. Sometimes the IRS asks for birth certificates or adoption papers of any children listed as deduction and a copy of your marriage license if you file married filing jointly.
To prepare, simply gather all the items you used for your original tax preparation and organize them in a logical order.
You can make copies of everything and staple the documents together in an organized manner for the audit. Make sure you keep the original checks and receipts safely in a file. Take those records to the audit with you in the event the agent requires further proof.
Besides the documentation, you also may want to organize the relevant worksheets you used to arrive at some of the deductions or credits. These often help.
Your Rights During the Audit Process
You have the right to have a tax attorney or accountant present during the audit. This is particularly helpful if they are the person that completed your taxes and can explain the deductions used.
Even if you prepared the tax return yourself, it can help if you take a tax professional along. Discuss the situation with a competent tax consultant to find if they feel it will help. Most of the time, it’s not necessary.
If an accountant did your taxes, you can give them the power of attorney to attend the audit for you and you don’t have to appear. This move can be quite beneficial if the IRS has questions that are difficult to answer. The accountant can postpone answering them by stating he has to confer with his client to find the answer on those concerns.
You have the right to tape the meeting. However, you can’t simply take the tape recorder with you and announce that you’ll be taping; you must notify the IRS ahead of time. They require a notice ten days before the audit.
Be Friendly
You’ll gain nothing by going into the tax audit hostile, except maybe an equally hostile greeting from the IRS. It’s best to remain cordial, answer any questions but don’t volunteer extra information. Most IRS agents are simply people doing their job. They don’t want to crucify you if you’re innocent.
If the audit doesn’t go your way, you still have recourse. You can appeal the decision by going to the agent’s supervisor.
If that doesn’t prove satisfactory, the Appeals Division of the IRS will hear your case and finally, you can take it to the U.S. Tax Court.
If you owe money, most of the time the IRS is willing to negotiate if there’s reason to believe the fine and money owed imposes a serious burden to your well-being.
The IRS agent isn’t an ogre, but they don’t take kindly to people that intentionally lie or cheat. Make sure you have all the proof necessary when you enter a tax audit.
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