Tips for Surviving an IRS Audit: It’s Never Too Early to Plan

They are the words that no tax-paying American wants to hear: “You’re being audited.” Paying taxes and preparing your tax return every year can be frustrating enough. However, if the IRS chooses to audit you, it can be a dreadful experience.

Even if you feel confident that you covered every detail and all of your deductions are accurate and legitimate, it’s still very easy to second guess yourself and worry about what an audit might uncover. It’s the financial equivalent of a full-body physical and any potential issues will be revealed and reviewed thoroughly. It is a commitment of time on your part to track down old records and receipts that may need to be shown to your auditor. Of course, in the end, you may have to pay more money to the government if discrepancies are indeed found.

There are typically three types of audits that can be performed, so it’s important to understand the differences.

Correspondence Audit

You’ll receive a letter from the IRS requesting specific additional information. This audit is conducted completely by mail, is the least intrusive and is the most common type.

Field Audit

An IRS agent will come to your home or business to personally examine your records, receipts and returns. This is certainly a more intrusive type of audit, and more likely to happen in extreme cases where tax fraud is suspected or bigger dollar amounts are on the line.

Office Audit

You will be required to visit an IRS office. Be sure to bring all documentation that supports any items in question. Make sure you are not wasting the auditor’s time and compounding your problems by not having the information that’s needed.

It’s important to note that the IRS will only ever contact you by telephone or mail. If you receive an email, consider it a scam and report it directly to the IRS.

How Likely Will You Be Audited?

The chances of being audited are relatively low. About 1% of all individual tax returns are audited each year. For those making $200,000 or more a year, though, the chances for an audit nearly quadruple.

In some cases, returns are selected at random to be audited, but most of the time a computer analysis at the IRS will catch a potential error and trigger the audit process. Here are some common items that might cause such a trigger:

  • Taxable income on your return that doesn’t match amounts on W-2, 1099 or other forms showing your income for the year.
  • Above-average charitable donations in relation to your income.
  • Deducting business meals, travel and entertainment that may seem inconsistent with your profession.
  • Home office deductions (perfectly legal, but just make sure your records are in order).
  • Foreign bank account assets not reported.
  • Concealing cash income or receipts (tips, gifts, etc.).
  • Excessive cash transactions over $10,000.
  • Complex business or investment transactions.
  • Close relationship to another taxpayer who is being audited.

What Do I Do if Selected for an Audit?

Here are some helpful tips in case you are being audited:

  1. Respond to the IRS within the stated deadline (usually 30 days).
  2. Gather all receipts and financial documents relating to the specified issue(s), which will be detailed in any initial correspondence from the IRS.
  3. Bring the specific documentation that is requested, keep your answers brief and don’t voluntarily provide extraneous information that could spark further investigation. If the examiner does ask for more information, you are allowed to ask for additional time.
  4. Seek representation from an experienced accountant or tax resolution company, like Community Tax.
  5. Don’t send original receipts to the IRS. They are not responsible for lost paperwork.
  6. Ask why your return was selected for an audit. You have the right to know.
  7. Always be polite, respectful and helpful to your examiner.

How Can I Avoid an Audit?

Review your tax return information thoroughly and make sure all your records and receipts are in order before claiming any deductions. Check your W-2 and 1099 forms to make sure the amounts are the same as what you are listing on your return. Download PDFs and print receipt emails for any online transactions or electronic bill payments. Get some document storage boxes and make a habit of saving every receipt and other financial records.

Most importantly, stay positive. As long as you are thorough and honest in your responses to the IRS, everything will work out fine. They may find some discrepancies and you’ll owe some extra money, but it won’t ruin your life and they’ll work with you to secure payments of any additional debt. There’s even a chance that the discrepancies will be in your favor and you’ll actually get a further refund!