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How to Survive a Tax Audit

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Rabbit ate my tax return!Now that we know how the IRS picks who to audit, we need to know what we can do to prepare for it. Even if you’re sure you got your return right, that you didn’t participate in an abusive tax avoidance scheme, or can’t possible be snared by the computers, there’s still that “randomly selected” bit.

So, like zombie attacks, the key to surviving a tax audit is to be prepared.

Keep Accurate Records

When you file your return, assume that you will be audited. Keep receipts of absolutely everything and keep them with your return. If you can’t produce proof of something you claimed and you’re audited, the deduction will be disallowed and you’ll be penalized for it. While the chances of you being audited are low, you need to retrieve the receipt now while it’s still fresh in your mind. If you get audited in four years, it’ll be hard to track it down.

Read the Notice

Read the notice carefully and respond as quickly as you can, though you generally have thirty days. Being proactive and helpful can turn the auditor into your ally. The audit will tell you what items on your return are being reviewed, prepare a copy of that documentation and bring it to the meeting (don’t give them originals, they might lose them and originals aren’t necessary). Bring only what they ask for! If they ask about certain charitable deductions, bring documentation of those deductions and nothing else. You don’t want them digging around and asking other questions. That’s not because you have anything to hide but because more questions mean more time and this is time consuming enough.

Also, you might have only received a CP2000 clarification letter, which is commonly known as a correspondence audit, which is the simplest type of audit. They call it a mail-order audit because a face to face meeting isn’t necessary, you only need to send in the documents they request.

Treat It Like A Trial

You should be cordial with the auditor but don’t treat them like your friend. At the end of the day their job is to find tax cheats and they’ve identified you as a potential cheater. It’s important that you review this IRS document that outlines your rights as a taxpayer under examinations and ensure that your rights aren’t violated.

The document also outlines the auditing process, or examination process, including a reference to Publication 556, which as details on appeals. If they disallow a deduction that you feel is rightfully yours, pursue it. Don’t let the IRS intimidate you, flex your muscles and arm yourself with the knowledge you need to prevail.

Consider a Tax Professional

If you have a particularly difficult situation that isn’t solved by offering up a forgotten 1099 or some other form, you may want to hire a tax professional who has experience dealing with audits. Audits can be very time consuming so you’ll have to select the tax professional very carefully but their expertise in dealing with numerous audits should aid you in getting as favorable an outcome as possible. It also helps that they aren’t emotionally invested in the process so they can make smart decisions.

In the end, getting audited sucks even if you don’t end up paying an additional cent in taxes. They are time consuming, stressful, and prevent you from doing something else (that you enjoy!). If you are well prepared and know how to respond, you can minimize both the cost and the time.

(Photo: wiredwitch)

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47 Responses to “How to Survive a Tax Audit”

  1. Soccer9040 says:

    I like to think I’m pretty organized, but if someone comes knocking asking about line 31A on my 2005 tax forms, I’m going to have to dig it all out of the box and think about it.

    How far back can they audit? I keep my stuff for 7 years.

  2. Jim says:

    I believe it’s 3 years if you’re honest, unlimited if they suspect you of some kind of fraud.

    I originally wrote 7 but I was wrong, 7 is just how long experts recommend you keep your records because the IRS can audit you as far back as 6 years if they believe you’ve underreported income by 25%, but still forever if fraudulent.

    • Shirley says:

      My parents have been deceased for the last two years and I ended up with all their paper ‘stuff’. They didn’t even file tax returns since 1998 so I’m pretty sure I can shred all that.

      Are there any papers that I should definitely keep? Like homes they bought or sold? Birth and marriage certificates or military papers?

      • ziglet19 says:

        I don’t know about what to keep for tax purposes, but I personally would definately want to keep the birth certificates, marriage licesnse, and military papers for geneology purposes. You never know when someone might be interested in seeing those. Or maybe you could at least scan them?

    • jsbrendog says:

      7 years? jesus. I haven’t even been filing taxes independently for 7 years and don’t have anything from when I was a dependent. fingers crossed the irs leaves me alone

      • echidnina says:

        Ditto on this. Scary…

      • Strebkr says:

        You are probably low risk to them anyways, unless you started making millions right out of school

      • You don’t need anything from the time you were claimed as a dependent on your parents’ returns. We “experts” recommend 7 years because of the reasons cited in Jim’s reply. The IRS will generally leave you alone if you have filed correctly, and your filings match the corroborating docs they receive. But they do random audits as well – but the percentage of audits to returns filed is extremely low.

    • jsbrendog says:

      oh thank god, 3 i can handle (and makes a lot more sense)

    • govenar says:

      “3 years if you’re honest, unlimited if they suspect you of some kind of fraud”
      Those two cases aren’t mutually exclusive… even if you’re honest, they could still suspect you of fraud.

    • Strebkr says:

      …and if you are not honest??? HAHA. I must have missed the box on my tax form asking if I was honest.

      Anyways, whats the difference between fraud and underreporting income. Arn’t they one and the same? And whats the difference between underreporting income and over reporting expenses? They both lower your tax liability. I wonder why the IRS cares about one of them more then the other.

      • The difference between underreporting and fraud is honest mistake (you didn’t get all of your 1099s, your W-2 was incorrect, etc.) and Al Capone – who was convicted and jailed, not for mob activities but for tax evasion, for not reporting all of his income from illegal activities. Purposely not including income from all worldwide activities (like the gambling winnings from that cruise to Jamaica) is fraud. Reporting the $1,437 you won at roulette and not the $$.50 you got in the slot machine is fraud. Not reporting the $.50 because you forgot is underreporting. The difference is not in the tax you have to pay – that is the same. The difference is in the intent – and for fraud there are penalties and possibly jail time (like the aforementioned Mr. Capone).

        Overreporting expenses is treated the same way – if it’s willful and you know when reporting it it’s incorrect, it’s fraud. If you calculated something incorrectly, it’s underreporting of net taxable income.

        It’s all about intent for the IRS, not the fact that you did it, but why.

  3. Shirley says:

    Once my tax return has been filed, accepted, and the refund received, I put all receipts (or copies of receipts) and the printouts of the filed returns into a 9×12 clear plastic envelope labeled with the year involved. We have a two-drawer file cabinet with these in one drawer and user manuals and warranties in the other. If an inquiry comes up, that year is really easy to pull.

    For safety I also have this tax info on my computer, well backed up both on site and off.

  4. Anonymous says:

    I read about the article that you posted on MSN about the mortage interest deduction. You said you deducted more than 11k of interest deduction. How big of the mortgage do you have?
    Are you aware that there is 1.1 mil of limitation on the loan and 100k on home equity loan.
    If your loan is more than 1.1 mil, you will receive notice from the Service very soon.

    Good Luck

    • Jim says:

      My mortgage is around $215,000 and my interest rate is 5.75% APR… which results in around $11k in interest payments. I’m nowhere near that limit. :)

    • Strebkr says:

      1.1 million @ 5.5% interest is over 60k in interest.

      Interesting, I didnt know there was a limit on this. Not that I’ll ever get near that, but interesting to know.

  5. Chris says:

    Always have an accountant on your team, and no, not the H&R Block guy, get a CPA.

    • Chris says:

      I understand not everyone can justify this if their finances are simple but if you question yourself on it at all, get one.

      • Strebkr says:

        and make sure you get a CPA who does taxes. I am a CPA, but I dont do taxes. I do my own taxes and I whine and complain as much as everyone else out there. I get all sorts of questions from friends and family about their taxes because they think I’m an expert. I know all the basics and maybe a bit more, and I know the theory behind all sorts of tax things, but when it comes to filling out the forms I can get lost quickly.

      • You may think you can’t justify it, but when you get audited later, you will spend much more getting help than if you planned properly in the first place. If you think you can’t spend an extra $100-200 now what if you have to spend an extra $1,000-$2,000 later to get it fixed? Tax audits can be expensive to get the right help, especially if you don’t want to deal with the IRS yourself (and seriously, I don’t recommend this in most cases). Think of it like insurance – you pay, say, $200 a month for car insurance, but you are a safe driver, never get in an accident, but think of how much you would pay later if you wrecked your car and didn’t have insurance to pay to fix it. You could be left with not only a repair bill, but if the car is totaled, you still finish making the payments and then have to get another car.

    • Thank you, Chris. I think a CPA is a great person to have that you can contact to ask questions throughout the year – use us for tax planning as well as tax prep! Almost everything you do that has a dollar amount attached may have tax consequenses, from paying for childcare to buying a car, to opening a business.

  6. ziglet19 says:

    Thanks for the advice in this article. I especially like that you pointed out only to bring what they request. In this situation, I think I would probably freak out and bring every scrap of paper that I could find.

    • Oh that’s the worst thing you can do! Don’t bring everything…it’s like letting the police in the front door on all those shows you see on TV, and as soon as they’re in they can look at any room in your house!

  7. hoht says:

    I’ve had this mentality that the IRS was like big brother, their out to get me. But the IRS bunny has put my mind at ease.
    How can something so cuddly cause me grief? :D

  8. Tax audits are such a scary thing to think about for most people. I also make sure to keep all my tax records together for every year just in case I need to reference something or for the case of an audit.

  9. freeby50 says:

    I think the best way to survive a tax audit is to not cheat on your taxes in the first place.

  10. Being honest is the best defense. Just think to yourself “If I DO get audited, will I be able to substantiate what I am reporting?”. If you can, then there is no reason to worry about being selected. There is absolutely no reason to fear the IRS if you are honest with the figures you report. It aren’t out to “get” anyone, but rather it is just making sure that everyone pays their fair share–no more, no less.

    What I do with my clients, is create a custom CD for each return. Each CD is labeled with the name and data contained on the CD, and generally consists of a PDF file of the return itself and another PDF file which I create from scanned images of the source documents used to generate the return. The source document file is arranged with bookmarks separating out the income and deductions, and then further broken down into the subsets (ie: Interest, Dividends, Itemized Deductions, Rental, etc.) This way, even if the client does save the paper records, they also have a sorted and condensed way to keep it as well.

    • freeby50 says:

      Yeah like Eric said. Honesty is the best defense if you’re audited. Its much easier to ‘survive’ an audit if you’ve done nothing wrong.

  11. eric says:

    Let’s hope I avoid this migraine forever!

  12. Josh says:

    If you have always taken the “Standard Deduction,” are you in any real danger of being audited? If so, what more could they ask for beyond W2s? Just curious, it’s never been in my best interest to itemize.

    • Gambling income, barter income, income from illegal sources, fake dependents, etc.

      But, yeah, for the most part, if you’re just copying the data from W2s and 1099s and taking the standard deduction, there’s not much incentive for them to come after you.

      • Even if you don’t itemize, you still have to report all sources of income, which can be an audit trigger. Every 1099 gets reported to the IRS, regardless of it is for interest, dividends, stock sales, contract labor, any kind of winnings, etc. Failing to report income is just as bad as claiming deduction for which you were not qualified to take, so the answer is yes, they can still come after you even if you take just the standard deduction. Look at it this way: the people who get charged with tax evasion don’t get caught because of the deductions, rather it is the failure to report income in most cases.

        • Moena says:

          Eric, I really like your way of preparing taxes w CDs . I want you to do my taxes are you anywhere near Dallas?

    • Technically, everyone is in “danger” of being audited in one of the random cases. If you have no unreported income and have a very simple return (no itemised deductions) you would have a very simple audit. I had one of these with a client and it took all of 20 minutes, and that’s even with the Q&A that goes on for 15 minutes at the beginning.

  13. lori says:

    what happens if you get audited and you lost all your paperwork in a move? we moved 6 months ago and lost alot several boxes in a move, one with all our paperwork in it…how can we explain most of the paperwork ect wit no back up?

  14. Jodie says:

    Jim, we have been audited twice by the IRS in two years. Once for our 2007 return and again for 2009. We have a family of four and make less than $60,000 per year. They claim we owe aver $2000 for both years although we paid the 2007 fees. Now they want another $900. We are barely getting by as is and we were devastated to see yet another audit notice in the mail last week. How is it possible that the IRS can continue to harass us when we have so little in the first place and is there any way we can file a complaint?

  15. Matt says:

    I have received a correspondence audit requesting mileage deductions and business deductions. I looked at the return and found that my tax guy put deductions from my previous year when I had a different job. It seems like he pulled my info from the previous year and he also put down that I drove 52k miles. Obviously I just signed the return and barely skimmed through it. My question is should i tell the auditor about the mistakes or just send the reciepts I have and let them adjust the return. I know I’m going to have to pay either way. I received 2k back on the return in question.

  16. juicy says:

    my identity was stole last year and somebody use my ssn# and got a refund in my name but i did my taxes this year and they took from my refund what the person last year got from me will i be audit

  17. A.A says:

    IRS AUDITORS WILL TELL YOU ITS NOT BASED UPON YOUR WORDING OR EXPLANATION,I HAVE BEEN GETTING TAX RETURNS ALL MY LAIFE AND IM 36 AND GOT MY FIRST AUDIT DUE TO MY NEW BUSSINESS I STARTED I REPORTED EVERYTHING LIKE I WAS SUPPOSE TO BUT MY PROBLEM BIOLED DOWN TO NOT KNOWING WHAT I COULD OR COULDNT REPORT I WASNT AWARE I COULDNT REPORT CERTIAN THINGS!SO I REPORTED VERYTHING AND CERTIAN THINGS I DIDNT EVE KNOW I HAD TO REPORT OR SHOULDVE REPORTED I DDINT, I DIDNT BECUASE I SIMPLY DIDNT KNOW I WAS SUPPOSE TO! AND THERES STUFF I DIDNT REPORT THEY I COULDVR REPORTED TO GET MORE REFUNDS BUT I DIDNT BECAUSE I DDINT KNOW I COULD REPORT THAT THATSBTHE PURPOSE OF NOT GOING ALONE AND THE PRUPOSE OF CONSULTING SOMEONE FOR HELP BECUASE ITS THINGS YOUDONT KNOW THAT WHAT COULD HURT YOU THE MOST IS WHAT YOUBDONT KNOW NOT WHAT U DO! IRS IS NOT YOUR FRIEND NO AUDIOTRS NOTHING DONTTRUST GET SOMEONE TO GO ON YOUR BEHALF YOUDONT HAVE TO BE PRESENT FROM WHAT SHE TOLD ME! AND JUST STAY CLEAR UNLESS IT GOES TO COURT THATS DIFFERENT AND HAVING A CPA WILL DECREASE AKLOT OF STUPID ERRORS YOU MAKE WHEN MEETING WITHB THEM OR TALKING OTHEM! THEY ARE BIG MAANIPULATORS THEY WILL BE NICE AND SWEET TO YOU TO GET YOU IN AND WHEN THEY DO GET READY CUZ IT WONT BE PRETTY I DONT KNOW WHY THEY SAY DONT FEAR THE IRS IF YOU GET AUDITED, NO DONT FEAR NOBODY BUT GOD BUT AT THE EN OF THE DAY JUSTBKNOW YOU ABOUT TO HAVE TO SPEND SOME TYPE OF MONEY WHEN U GET AUDITED WHETHER ITS TO GETA CPA OR PAY THEM BACK


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