The IRS will assure you that you’ve been randomly selected for closer examination. There are essentially two types of audits: correspondence audits and full audits. A correspondence audit entails receiving a letter from the IRS that changes a portion of your tax return and asks you to present information to challenge their change if you disagree. The full audit is the kind that you’ve probably heard of. This is where the IRS meets with you personally to discuss one or more pieces of your tax return. In either case, providing the IRS with pertinent information regarding the questions they ask and nothing more is the best way to handle the situation.
Here’s an example of one Manhattan man’s experience with a full audit:
He methodically gathered all his receipts and documents to corroborate his business deductions as a self-employed writer. Everything filled several boxes. He heard stories from people who shared his predicament — such as one woman who was summoned to the IRS offices five times.
Looking back, he is surprised that he was so smug about his preparations, even waving off his tax preparer when he offered to accompany him. Oh no, he thought, I can handle it.
Big mistake. One of the best things that you can do in the case of a major audit is to hire a representative to speak for you. You don’t even have to attend the meetings as long as your representative does, and not attending is often the best course of action. The IRS will often try to extract information from you that you don’t even realize you are giving them by asking questions about your lifestyle and business operation. A representative will be experienced in containing the IRS audit.
So, sleeping very poorly for the two days before his initial meeting with IRS examiners, he was exhausted when he arrived at the IRS office. After passing through tight ground-floor security, he ascended a long escalator leading to another security desk as he towed documents in a cart behind him.
He was greeted by an examiner with a shaved head — the bad cop, he decided. He rarely smiled. In a conference room, a second examiner, shorter and friendlier with shoulder-length hair — the good cop — took notes. Two examiners? Was I this important or in so much trouble, he wondered.
The upshot? Three hours to learn that his home-office deduction was in question. This time, he listened to his tax preparer, seeking a second interview to which his preparer would tag along.
The preparer had claimed 47.3 percent of his client’s apartment for work. The examiner asked for proof of rent, actual floor plan and square footage. The preparer requested a third meeting.
At the third session, an IRS supervisor accompanied the bad-cop auditor. They went back and forth over business use of his client’s home. A compromise was reached at 33 percent — so the home office deduction was saved, to the great relief of the freelance writer. Luckily for him the audit did not spread to other areas that could have prolonged the process even further.
So what did this Manhattanite do right and what should you do if audited?
- Gather your documents. Start going through your records to find relevant receipts and documents. If you can’t find a document, request a duplicate. Auditors won’t accept the excuse that records are missing or lost.
- Contact your tax preparer. He or she can explain the audit process and help you prepare. You can hire a professional tax lawyer as well, and should if the issues are complex and you don’t have complete information.
What documentation should you bring? Receipts, mortgage statements, brokerage account statements, and pay stubs or W-2 forms. You may bring record books to substantiate certain claims on your tax return. This is important — if you’re unable to document the items in question to the IRS’s satisfaction, things get a little more complicated. The IRS will propose changes to your tax return.
You can challenge the agent’s assessment and set up a conference with an IRS manager to further review your case, or you can request a formal appeals conference. Keep in mind that interest will accrue on any unpaid tax from the date you filed your return, including the duration of the audit process. So it’s usually not worth appealing unless you’re almost certain you’ll win.
As long as everything you claim on your tax return is factual, an audit should be no more than a minor inconvenience. If you’re an honest taxpayer who knows what to do in the unlikely event of an audit, you should sleep soundly.
What happens after the audit? You will be notified of the findings. The auditor will explain any adjustment to you and/or your representative before finalizing the audit. If you have information auditors haven’t considered, or if you believe a mistake has been made, contact the auditors promptly. They will discuss future filing responsibilities and answer any questions you have concerning the audit.
