What if you're among the unlucky taxpayers to get an audit notice from the IRS? Take a deep breath – here's what to do.
The Internal Revenue Service is severely underfunded, which means the odds are low that your federal tax return will be audited. After losing about a quarter of its enforcement staff amid recent budget cuts, the agency’s capacity is the lowest it’s been in a decade, according to U.S. News & World Report.
The chance of an audit is under 1 percent on average — but soars to nearly 35 percent in the uppermost income brackets, according to a breakdown by the nonprofit Tax Foundation. But if you are among the unlucky ones who open the mailbox and find a notice of audit, here’s how to proceed:
1. Take a deep breath
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Calm yourself. After the shock wears off, reread the IRS letter to understand exactly what it says. Look for details explaining which aspects of your tax return are in question and precisely which documents you need to provide. “If you filed your tax return yourself and you have a complete understanding of each item on your return, you should be able to make it through an audit without any trouble,” says CNBC.
2. Understand your rights
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Hearing from the IRS can be scary, but you have rights. The IRS adopted a 10-point Taxpayer Bill of Rights in 2014 acknowledging those rights.
A couple of examples:
- IRS rules give the agency just three years from when you filed your return to demand any additional money for that tax year. (There are a few exceptions, including a finding of fraud on your part.)
- The IRS has 10 years to collect back taxes from you.
3. Get help
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If you hired a CPA to prepare your tax return, or if you did your own return but feel unequipped to face the IRS, get professional help. Check with the tax adviser who prepared your taxes to see if representation during an audit is part of the service. If not, learn the cost of hiring representation.
Accountants often caution their clients not to respond directly to an IRS notice. There is potential for problems, such as bringing down additional scrutiny on yourself by saying the wrong thing or trying to respond to a question you’d be better off not answering.
“Not only does a tax preparer have a professional stake in their clients’ audits, they have the knowledge and expertise to easily identify the reason for an IRS exam and help businesses and individuals prepare documentary evidence to counter claims of tax deficiencies,” says legal website Nolo.
A representative acting on your behalf can always plead ignorance of the answer, follow up with you and then get back to the auditor. “This not only buys time for you to think carefully about how you will answer; it may also let the question drop if the auditor fails to follow up on it,” [enrolled agent Steven J. Weil of RMS Accounting in Fort Lauderdale, Florida] says.
If the IRS brings up tax fraud, get a tax adviser to represent you. Also, if a meeting with the IRS seems to be going poorly, request a recess to consult with an adviser.
4. Get a postponement
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Schedule your appointment with an auditor as far in advance as possible so you have plenty of time to prepare for the meeting. If you need more time, just before the meeting date, ask for a postponement so you can continue your preparations. Be sure to get a response to your request — in writing.
5. Meet on neutral ground
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When scheduling your meeting with the auditor, hold it on neutral territory — at your tax adviser’s office or at another venue. Holding it at your home or office puts you at a disadvantage. “If you are asked to host an audit at your business premises, consult a tax pro,” advises Nolo.
6. Meet every deadline
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Don’t make grief for yourself by blowing off crucial deadlines for filing responses, attending meetings and producing documents. Stay on top of every single deadline.
7. Thoroughly prepare for your meeting
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Begin immediately locating and organizing your tax returns for the year in question and pull out all supporting documentation. This enables you to see and gain command of the materials in question, fill in any gaps and familiarize yourself with the documents. Also, there are more subtle benefits: You’ll gain confidence from preparation and having command of your response, and attending meetings thoroughly prepared tells your auditor that you are diligent and respect the process.
8. Resist the urge to be extra-helpful
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Give the auditor exactly what was requested and nothing more. Answer the questions you are asked, and produce the documents requested. But do not bring to a meeting or offer to produce copies of other years’ tax returns or any documents that are not named in the audit request. “You do not want them opening up lines of questioning on other issues because you said or showed something that made them question something else,” says CNBC.
Nolo offers this advice:
If you have something to hide, don’t provide evidence to the auditor, but don’t lie, either. The adjustments she may make could be less damaging than if you had given her what she asked for.
9. Recalibrate your expectations
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You may well be required to pay a penalty. Depending on why your return is being audited, emerging from an audit scot-free may not be a realistic goal.
10. Negotiate on the issues
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When you get the auditor’s report, you can call the auditor if you disagree with the findings or do not understand them. If that is not satisfactory, request a meeting with the auditor’s manager, and try to come up with a compromise.
But haggling with the IRS auditor over how much tax you owe is not a winning strategy. Neither is pleading poverty. “Instead,” says Nolo, “negotiate tax issues — for example, whether a certain deduction should be allowed.” In other words, make sure you understand the auditor’s points and mount a reasonable, well-researched case to rebut them, backed up by your documentation.
11. File an appeal
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If your efforts to discuss the findings don’t produce a satisfactory result, and you receive a Statutory Notice of Deficiency (or “90-day letter”) saying you owe additional taxes and listing the areas where the IRS disputes your tax return, you have the right to appeal and will have 90 days to make the appeal. The IRS publication “Your Appeal Rights and How to Prepare a Protest if You Don’t Agree” explains the options. Nolo also explains in “The Pros and Cons of Appealing an IRS Audit.”
What’s your experience of being audited or impression of the IRS process? Share with us in comments below or on our Facebook page.