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How to Handle a Tax Audit

There are few rules about who gets audited and why. Maybe it's something you did; maybe it's something you didn't do.

Short-form filers are the least likely to be called in for a chat with the IRS. Small-business owners are at greatest risk, three times more likely than wage earners, reports Money Magazine. ("Audit Triggers," Money, March 2003, p. 90.)

The odds go up with your income and number of deductions. The more gray-area chances you take, the greater the probability. Then there's just the luck of the draw, the random name spit out by the computer.

Win or lose, an audit can be a traumatic event. The cost in terms of time, worry and the disruption of your life spent on the quest for paperwork can be high. Also, keep in mind that, even though the audit itself is not an automatic indication of guilt, if the IRS calls you in, it expects to come out of it with at least some additional money. Your goal should be to get it over with as quickly and painlessly as possible.

How should you handle an audit?
In an interview with New York Life, James J. Vandenberg, of Century Small Business Solutions, offered the following general suggestions:(Interview, April 1, 2003. For more information, contact Jim Vandenberg at jjvekw@aol.com.)

  1. Get your records in order. This creates less work for the auditor (which helps) and shows that you are well organized. Don't dump a shoe box full of receipts on the auditor's desk. That's just asking for trouble.
  2. Go in prepared. Don't rely on the IRS to tell you what's wrong. While auditors are just trying to do their job, that job is to find money in your return. The audit notice will explain the points of inquiry. Go in knowing whether or not you believe the grounds are valid. Have a response and a strategy ready to present.
  3. Only provide the information that was requested. Most audits focus on specific items. If the auditor didn't request something, you are not required to bring it. The problem: Bringing unrequested documents can open other areas of inquiry.
  4. Bring professional representation. This is not the time to pinch pennies. You have the legal right to be represented by your accountant or tax attorney, and you should take advantage of that opportunity. At the very least, even if you don't use an accountant to prepare your returns, get one's advice before going in. It could save you a lot.
  5. Don't go in with a chip on your shoulder. This is not the time to voice your feelings about the unfairness of the tax system or the intelligence level of the people who work for the government. Don't give the auditor reason to want to dig for something. At the same time, don't be intimidated. Be cordial, friendly, cooperative... yet firm.
  6. Don't sign anything that you don't fully agree with or understand. Insist on time to review all documents and to discuss them with your attorney or accountant.
  7. Negotiate. Never pay a penalty without at least attempting to have it set aside. Do the same with interest charges on any money you may owe.

Also, remember, you have rights. To learn more about them, call for a free copy of the booklet, "Your Rights as a Taxpayer." The toll-free number is (800) TAX-FORM.

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How to Handle a Tax Audit

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