While no one wants to get letter in the mail from the IRS telling them that they are being audited, it isn’t always as bad as you might think. Before you go into a state of panic, take some time to actually read what the notice says. Many people jump right to the conclusion that you are going to be dealing with a full-blown audit, when that typically is not the case. Often times, you can clear the issue up in no time at all. However, there are a few things that you should know that willl help in the face of a difficult audit.
You have a right to professional asistance.
Tax attorneys, CPAs and enrolled agents can represent you when you’re going through an audit. They can also provide valuable assistance preparing for an audit. They know the audit process and the tax laws and are capable of representing you better that you probably can, particularly regarding a complex audit. That goes double if you have “problems” in the background. You have a right to repsresentation.
Keep accurate records.
While anyone can grab their documents together before the time April 15th hits, you need to take things beyond just throwing things into a pile. You want to make sure all of your tax records are accurate, up-to-date and organized. When everything is neatly filed away with the supporting tax return, it makes it easier for you to be able to find everything you need in the event of an audit. I have often said that good records are the best tax shelter there is. And that’s a fact.
Don’t be shy.
The IRS likes to create the impression that it makes all the rules, e.g. when the audit will start, when it will be continued, where it will take place, what will be audited, etc. Actually, both sides should cooperate to insure the audit proceeds smoothly. Both sides can help each other, and they both benefit if they do. The taxpayer has a right to help determine when and where the audit will occur. The taxpayer’s obligation is to be ready at the starting gate, with all requested records in the room. The IRS should take care to review carefully the return(s) to be audited and the return line items to investigate. Often the IRS will choose to review returns for the year before and the year following the year to be audited. If a business audit, the principals’ returns may also be subject to audit. My preference is to provide returns if possible, but to insist that they too be reviewed ahead of time. If the “IDR” (information document request) seems overly broad, you should feel free to discuss the problem first with the revenue agent. If a reasonable agreement is not reached, call his or her manager. The IRS should not set a pattern of beginning with a couple of items, coming back later for others, and so forth. Audits conducted like that will seem to take forever. A carefully planned audit should allow the IRS to begin and end the audit on an agreed time-line, with only overnight interruptions. Ask that the audit be planned so that once it begins, it will continue until finished. Yes, during an audit, something may turn up that makes unanticipated items relevant. Please be patient on those occasions.
There was a time when if a taxpayer refused to produce records, the IRS would issue summonses to require their production. Summons enforcement gave taxpayers a fair amount of leverage, primarily through the delays caused by enforcement. Now, the Service’s usual decision is to terminate the audit and send a notice of deficiency setting up numerous tax issues that a taxpayer will have to appeal and address at a later time.
Before an audit begins, follow two general rules. One, use common sense. Two, have the confidence to know that you have rights also.