Five steps to take if you’re audited by the IRS
Getting audited is no one’s idea of a good time, yet you can minimize the stress if you take the right approach. Here are five steps you can take if you ask yourself, “What do I do when I’m audited?”
Being prepared for an audit
Step 1: Understand why and when. While it’s possible you were a random selection, it’s more likely that there was a specific reason. One example might be if your deductions for charitable donations or business expenses were greater than is typical for your income or profession. Try to comprehend the challenges before continuing so you know how to respond.
Your chance of being audited rises along with the size of your income. With $200,000 a year in income, the chances of an audit nearly double for you (1.01% in FY2016) compared with a person who has half that income. People with over $10 million in income have a nearly 1-in-5 chance of an annual audit.
Step 2: Consider the type of audit. There are three types of audits, in increasing levels of seriousness: a correspondence audit, (conducted through the mail); an office audit (a visit to the nearest IRS office); and a field audit (an IRS agent comes to visit you). How you prepare will vary depending on the type of audit.
About 70% of audits are completely through mail correspondence which typically involves routine issues like providing information about deductions. With proper documentation and prompt attention, they can be relatively painless to resolve. Office and field audits can be trickier and will involve more work and preparation.
What to do when audited
Step 3: Gather documents. Once you’ve understood the reason and the type of audit, gather and organize as many of your relevant records as possible to prepare your response. For example, if the audit is specifically about deducting vehicle costs for business use, gather your mileage logbook, receipts, and other supporting documentation. This will help prove your case and let the IRS know you are a responsible taxpayer.
If you do not have adequate documentation, you can try to get third-party corroboration. For example, if you took charitable deductions but lost the receipts, you could try reaching out to the charity for their records. While the charity cannot create new receipts, they may have copies of confirmations sent out to you at the time of your donation.
Step 4: Know your rights. You have rights to ensure you get a fair chance to state your position. Specifically, you have the right to clear explanations about what the IRS wants and their decision regarding your case. You have the right to appeal the IRS’s decision. You also have the right to have your accountant or lawyer represent you during the audit. In addition, a special Taxpayer Advocate Service is available to help you navigate problems with your case. While you should stand up for your rights, always be polite with the IRS agents. They are just doing their job and you aren’t doing yourself any favors if you show hostility during an audit.
Step 5: Get help. No matter what, reach out immediately if you get a letter from the IRS. It pays to have the right help because an experienced professional can guide you away from costly mistakes. Too many taxpayers have corresponded with the IRS without this help and have paid the price. Try as you might, you probably do not know the tax law as well as the IRS.
Audits happen. How you handle them can make all the difference. Please contact our RRBB accountants and advisors if you need help.
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