Sooner or later most taxpayers are going to be audited. Business
owners, wealthy individuals and those with unusual returns stand
higher risks of audit, but as IRS improves its ability to match
bank and investment records with individual returns, more and more
"average" taxpayers are likely to be asked for additional
information.
There are three types of audits:
Correspondence audits are simplest.
They usually involve one bit of unreported income or one deduction
and can be handled entirely by mail. Simply mail copies of the
information that supports your position. Correspondence audits
are by far the most common, but most taxpayers don't consider
them "audits."
Office audits involve meeting with
a revenue agent at an IRS office about specific aspects of your
return. The tips below apply primarily to office audits.
Field audits take place at your
place of business, your accountant's office, or, more rarely,
your home. Seek professional assistance if you're contacted for
a field audit. Your Union Plus Legal Service attorney can help.
Here are six suggestions for handling
an office audit:
Don't Hesitate to
Seek Professional Help. Most correspondence audits and some
office audits just involve clerical matters such as supplying
receipts, but others involve complex legal issues or close judgment
calls. You are entitled to be represented by an attorney, accountant
or enrolled agent at any stage of the audit process. Once you
choose a representative, IRS will not contact you directly but
will work through your representative. If you have any doubt about
your ability to handle an audit, call your attorney.
Know Your Appeal
Rights. If you can't reach agreement with the revenue agent
you are entitled to a hearing by the IRS Appeals Division. If
their decision is unsatisfactory you have two choices: 1. appeal
to the Tax Court or 2. pay the tax and sue for a refund in Federal
District Court or the Claims Court. You shouldn't file for any
appeal without professional advice, but it can help give you confidence
to know the revenue agent's opinion isn't final. And it can help
keep the agent reasonable for him to know you know.
Organize Your
Presentation. Have copies available for the agent of all relevant
records. (Never give IRS originals.) Have a printed copy of the
calculations you rely on. Clearly present your reasoning, records
and calculations. Don't fudge. If a figure is an estimate, show
why it's only an estimate and why it's a reasonable one.
Don't Volunteer
Information. Take to the audit only records related to the
items specified in the audit letter. Your audit usually will not
go beyond those items, but the agent is permitted to expand the
scope of the audit. That's less tempting if it means he has to
schedule another meeting. Don't offer explanations or records
for other items, even if you can't see how they can hurt you.
Be Reasonable,
Professional and Polite.
You're unlikely to successfully bully or sweet-talk an agent.
They've heard it all before. But they're human, so they'll find
it easier to be reasonable if you are. If you think an agent is
being unreasonable, you have a right to speak to his supervisor.
That may also be advisable if you feel the agent is wrongly interpreting
the law.
Be Open to
Compromise. Agents are under pressure to close cases and generate
revenue. They don't want too many of their cases appealed, and
they don't want to lose the ones that are. That can give you leverage
for an advantageous quick settlement or can mean you'd be better
off waiting. Don't be pressured into an on-the-spot settlement,
but recognize that it might be your best bet. You shouldn't expect
a full deduction if you don't have full documentation.
