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The four words that every American shudders to think of: “You are being audited.” Learn what to expect and what you will need to do to survive an IRS audit.
As a taxpayer in the United States, we all stand the risk of one day being audited by the Internal Revenue Service. For the most part, your chances are slim—although audits are on the rise and certain factors make some stand out more than others. If you’re one of the unlucky few to receive a letter from the IRS, learn what you can expect and what you’ll need to do to get through an audit.
Why was I selected for an IRS audit?
Returns with very large gross incomes, significant capital gain transactions and those with Schedule C’s are frequently picked for auditing. (Sole proprietors who file Schedule C’s are often selected due to the amount of deductions claims in relation to business income.) In addition, taxpayers who fail to report income, improperly report items or omit information are likely to be selected as well.
How are audits conducted?
Some audits are conducted entirely by mail while others require a meeting at an IRS office. Those facing an audit (also called an examination) will receive a letter that explains what year is being audited and what paperwork and information is needed by the IRS. If you feel you need additional time to prepare for the audit, request a postponement of your audit date.
What should I bring to an audit?
Bring with you only the documents and information specifically requested by the IRS. Do not bring copies of previous years’ returns or any other documents. If you do, you could unwittingly open yourself up to further investigation.
Should I hire representation?
You have every right to be represented at your audit by a CPA, attorney, the individual who prepared your return, or even an IRS enrolled agent. And, in many cases, if you do hire representation you likely won’t need to appear at the audit meeting. However, representation can be expensive. You’ll need to consider the dollar amount in question, the complexity of your case and your comfort level in dealing with the IRS to determine whether or not it makes sense for you and your situation.
What fees can I expect?
Your proposed tax deficiency by the IRS will incur interest at the federal short-term rate plus 3 percent per year from the filing date of the return in question to the date you pay the total amount owed. And this interest compounds daily, which can add up quickly.
To stop interest from accruing, you can make payment to the IRS—even before the audit is completed. To do this, you can pay part of the anticipated owed tax or make a tax deposit. (You’ll have to deposit the full amount of the tax and interest to stop accruing additional interest.) Neither of these options will deprive you of your right to an appeal if you ultimately disagree with the IRS’s final figure.
What if I don’t agree with the result of the audit?
You have a number of options. First and foremost, if you are not comfortable with what the IRS says you owe, do not sign anything—do not indicate whether you agree or disagree with the decision or any part of the decision. Ask the auditor to run a report showing the tax, penalties and interest being proposed and then take that report to talk over with your CPA, attorney or other advisor—or simply review it thoroughly yourself.
If you disagree with the end result, you have the right to an administrative appeal and must file a protest with the Appeals Division within 30 days. Appeals can take anywhere from four to 18 months to complete. Keep in mind that if you do appeal the findings, interest will continue to accrue on whatever tax liability is ultimately agreed upon.
What are my rights as a taxpayer?
Know your rights before going into an audit. IRS Publication 1 explains the Taxpayers’ Bill of Rights and free IRS publications, available at IRS.gov and at district IRS offices, can provide you with helpful information and guidance. If you are still unclear about the tax law, consult with a tax professional.
This article contains general information. Individual situations are unique; please, consult with your CPA or tax attorney before utilizing any of the information contained in this article.
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