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How to Survive a Tax Audit

Posted By Jim On 03/10/2010 @ 7:20 am In Taxes | 47 Comments

Now that we know how the IRS picks who to audit [3], 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 [4], 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 [5] 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 [6], 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 [7])


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/how-to-survive-a-tax-audit.html

[3] how the IRS picks who to audit: http://www.bargaineering.com/articles/how-does-the-irs-pick-tax-returns-to-audit.html

[4] CP2000 clarification letter: http://www.bargaineering.com/articles/irs-cp2000-clarification-letter.html

[5] your rights as a taxpayer: http://www.irs.gov/pub/irs-pdf/p1.pdf

[6] Publication 556: http://www.irs.gov/publications/p556/index.html

[7] wiredwitch: http://www.flickr.com/photos/wiredwitch/3278887879/sizes/s/

Thank you for reading!