Navigating An Audit: What to Do if Youre Audited by the IRS

Discovering that you are being audited by the Internal Revenue Service (IRS) can raise a surge of panic. It's definitely a serious matter, but there's no need to panic. This guide is designed to help you understand the process, what to expect, and how to navigate the situation, should you find yourself being audited by the IRS.

Understanding The IRS Audit Process

An IRS audit is a comprehensive review of your tax returns to confirm that your reported financial information and deductions are accurate. It’s not necessarily a cause for panic. Often, it is a random selection process, or it could be because something in your tax return caught the eye of the IRS. This could be anything from an honest mistake to suspected fraudulent activity. Be aware, even if you’re selected for an audit, it doesn't automatically mean you’ve done something wrong.

Types of Audits

When it comes to audits, the IRS has three main categories:

1. Correspondence audits: This is the most common and the simplest type of audit. It is generally carried out through the mail and may require clarification or additional documentation.
2. Office audits: A bit more serious, these involve a face-to-face interview and review of records at the IRS office. This type generally focuses on a few specific items in your tax return.
3. Field audits: This is a comprehensive review conducted by an IRS agent at your home, office or accountant's office. They are rare but quite exhaustive, covering many, if not all aspects of your tax return.

Receiving The Audit Notice

If you're selected for an audit, the IRS will inform you via mail. Beware of phone calls or emails claiming to be from the IRS, as they do not initiate audits in this manner and these are undoubtedly scams.

The notice will specify which aspects of your tax return are in question and what documents you must provide. It will also state the type of audit that will be conducted. After receiving the notice, you usually have 30 days to respond.

First Steps After Receiving an Audit Notice

Once you've received the audit notice, the following steps are crucial:

1. Stay calm: It's natural to be worried, but bear in mind, it's often just a verification process.
2. Review the notice: Read the notice thoroughly and understand what aspects of your tax return are being questioned.
3. Gather your documents: Start collecting the relevant documents as mentioned in the audit notice.
4. Contact your tax preparer: If a professional prepared your taxes, inform them about the audit. They can help you understand the notice and guide you through the process.

Engaging a Tax Professional

Whether you prepared your taxes yourself or hired a professional, now might be a good time to have an expert by your side—especially for office or field audits. A Certified Public Accountant (CPA), attorney, or Enrolled Agent (EA) can represent you in front of the IRS, prepare necessary documentation, negotiate on your behalf, and generally guide you through the process.

This decision depends on the complexity of the audit, your understanding of the tax laws, and your comfort level interacting with the IRS.

Understanding Your Rights

As a taxpayer subject to an audit, you have certain rights. You are entitled to:

1. Professional and courteous treatment from IRS employees
2. Privacy and confidentiality about tax matters
3. Know why the IRS is asking for information, how it will be used and what will happen if the requested information is not provided
4. Representation, either by oneself or an authorized representative
5. Appeal disagreements, both within the IRS and before the courts

Understanding your rights can help you navigate the process more confidently and ensure fair treatment.

Preparing for The Audit

Whether you're handling the audit yourself or have hired a professional, preparation is key to a smooth audit process.

1. Organize your documents: Gather and organize the requested materials. The IRS may request bank statements, receipts, bills, legal papers, loan agreements, logs, or diaries. Well-organized and prompt responses can favor a positive outcome.
2. Understand IRS documentation: Familiarize yourself with the tax return in question. You should also learn some basics of the tax law pertaining to your audit, especially if you're facing the audit without professional representation.
3. Know what not to bring: Only present what is asked for. Any additional information can potentially open up new areas of inquiry.

During The Audit

During the audit, be courteous and professional. Conduct in a respectful manner so as to not antagonize the IRS agent. Answer the questions asked but avoid volunteering additional information unless asked to do so.

If You Agree With The Audit Findings

If you agree with the findings of the audit and find that you owe additional taxes, you will be required to sign a document called an examination report, which states that you owe additional tax. If you can’t pay the whole amount at once, you can request a monthly payment plan or make an offer in compromise to pay less than you owe.

If You Disagree With The Audit Findings

If you disagree with the findings, you don't have to sign the examination report. You can request a meeting with the auditor's supervisor, express your concerns in writing, or even appeal within the IRS or in court. Remember, you have the right to be represented by a tax professional throughout this process.

After The Audit

Once the audit is completed, you'll receive an 'examination report' detailing the findings. It will outline any changes to your tax return and the corresponding changes to your tax liability. If you've agreed with the results, you'll need to arrange payment. If you disagreed, you'll receive a 'notice of deficiency,' after which you have 90 days to file a petition with the Tax Court. If you did nothing during this period, the IRS will send a bill for the amount owed, and collection processes will start.

Avoiding Future Audits

Prevention is always better than cure. Maintaining accurate records, reporting all income earned, being honest with deductions and credits, and seeking professional help when needed can help avoid audits in the future.

Navigating Through the Process

Being audited by the IRS can definitely be an intimidating experience, but with the right approach and preparation, it can be managed efficiently. Remember, you have rights during an audit and seeking professional help, particularly for complex situations, can greatly aid in the process while bringing you peace of mind. Above all, regular compliance with the tax laws is your strongest defense against any potential scrutiny.