How To Deal With Tax Audit

On a list of real-life nightmares, most people would rank tax audits right up there with root canals, rectal exams, and court appearances. Many people are traumatized by audits because they feel like they’re on trial and being accused of a crime. Take a deep breath and don’t panic.

You may be getting audited simply because someone at the IRS or a business that reports tax information on you made an error regarding the data on your return. In the vast majority of cases, the IRS conducts its audit by corresponding with you through the mail.

Audits that require you to schlep to the local IRS office are the most feared type of audit. In these cases, about 20 percent of such audited returns are left unchanged by the audit — in other words, the taxpayer doesn’t end up owing more money. In fact, if you’re the lucky sort, you may be one of the 5 percent of folks who actually gets a refund because the audit finds a mistake in your favor!

Unfortunately, you’ll most likely be one of the roughly 75 percent of audit survivors who end up owing more tax money. The amount of additional tax that you owe in interest and penalties hinges on how your audit goes.

Preparing For An Audit

Preparing for an audit is sort of like preparing for a test at school. The IRS lets you know which sections of your tax return it wants to examine.

The first decision you face when you get an audit notice is whether to handle it yourself or hire a tax advisor to represent you. Hiring representation may help you save time, stress, and money.

If you normally prepare your own return and you’re comfortable with your understanding of the areas being audited, handle the audit yourself. When the amount of tax money in question is small compared to the fee you’d pay the tax advisor to represent you, self-representation is probably your best option. However, if you’re likely to turn into a babbling, intimidated fool and you’re unsure of how to present your situation, hire a tax advisor to represent you.

If you decide to handle the audit yourself, get your act together sooner rather than later. Don’t wait until the night before to start gathering receipts and other documentation. You may need to contact others to get copies of documents you can’t find.

You need to document and be ready to speak only about the areas the audit notice says are being investigated. Organize the various documents and receipts into folders. You want to make it as easy as possible for the auditor to review your materials. Don’t show up, dump shopping bags full of receipts and paperwork on the auditor’s desk, and say, “Here it is — you figure it out.”

Whatever you do, don’t ignore your audit request letter. The IRS is the ultimate bill-collection agency. And if you end up owing more money (the unhappy result of most audits), the sooner you pay, the less interest and penalties you’ll owe.

How To Deal With Tax Audit 

1. Treat the auditor as a human being 

This advice may be obvious, but it isn’t practiced by taxpayers very often. You may be resentful or angry about being audited. You may be tempted to gnash your teeth and tell the auditor how unfair it is that an honest taxpayer like you had to spend hours getting ready for this ordeal. You may feel like ranting and raving about how the government wastes too much of your tax money, or how the party in power is out to get you. Bite your tongue.

Believe it or not, most auditors are decent people just trying to do their jobs. They’re well aware that taxpayers don’t like seeing them. Don’t suck up, either — just relax and be yourself. Behave as you would around a boss you like — with respect and congeniality.

2. Stick to the knitting

Your audit is for discussing only the sections of your tax return that are in question. The more you talk about other areas or things that you’re doing, the more likely the auditor is to probe into other items. 

Don’t bring documentation for parts of your return that aren’t being audited. Besides creating more work for yourself, you may be opening up a can of worms that doesn’t need to be opened. Should the auditor inquire about areas that aren’t covered by the audit notice, politely say that you’re not prepared to discuss those other issues and that another meeting should be scheduled.

3. Don’t argue when you disagree

State your case. When the auditor wants to disallow a deduction or otherwise increase the taxes you owe and you disagree, state once why you don’t agree with her assessment. If the auditor won’t budge, don’t get into a knock-down, drag-out confrontation. 

She may not want to lose face and is inclined to find additional tax money — that’s the auditor’s job. When necessary, you can plead your case with several people who work above your auditor. If this method fails and you still feel wronged, you can take your case to tax court.

4. Don’t be intimidated

Most auditors are not tax geniuses. The work is stressful — being in a job where people dislike seeing you isn’t easy. Turnover is quite high. Thus, many auditors are fairly young, just-out-of-school types who majored in something like English, history, or sociology. They may know less about tax and financial matters than you do. The basic IRS tax boot camp that auditors go through doesn’t come close to covering all the technical details and nuances in the tax code. So you may not be at such a disadvantage in your tax knowledge after all, especially if you work with a tax advisor (most tax advisors know more about the tax system than the average IRS auditor).

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