Getting audited by the IRS ranks somewhere between finding a spider in your shower and discovering your favourite coffee shop closed permanently. Nobody wants it, but when it happens, panicking certainly won’t help. The good news? Most audits are straightforward affairs that you can handle with the right approach and documentation.
An IRS audit simply means the agency wants to verify the accuracy of your tax return. Think of it as the IRS saying, “Hey, we just want to double-check some things.” While the word “audit” sounds scary, most examinations focus on specific items rather than your entire financial life. The IRS conducts audits through mail correspondence, office visits, or field audits at your home or business.
The IRS uses computer programs to flag returns that don’t match expected patterns. High income, large deductions relative to income, and discrepancies between reported income and third-party documents often catch their attention. Ready to learn what to do if you’re being audited by the IRS? Take a look at these notes; here’s to hoping you never need them.
Take These Steps Immediately After Receiving Your Notice
First things first: read the entire notice carefully. Don’t just scan it and toss it aside while hyperventilating. The IRS clearly states what they want to examine, which tax year they’re reviewing, and what you need to do next. They also provide deadlines, and missing these can complicate your situation significantly.
Contact the IRS only if the notice instructs you to do so. Many people rush to call, but correspondence audits require written responses, not phone calls. If you must call, use the phone number printed on your notice, not a general IRS number you find online.
Make copies of everything. The original notice, any documents you plan to send, and anything else related to your audit needs backup copies. Create a dedicated file folder for this audit and keep everything organized. You’ll thank yourself later when you can quickly locate specific documents.
Determine your response timeline and mark it on your calendar. Most audit notices give you 30 days to respond, but some allow more time. Don’t wait until the last minute to gather your materials or seek professional help. The time to act is when you receive notice.
Gathering Documents: What the IRS Wants To See
The IRS wants proof that supports the items on your tax return they’re questioning. If they’re examining your charitable deductions, they want receipts, acknowledgment letters from charities, and bank records showing the donations. For business expenses, they want receipts, invoices, cancelled checks, and documentation showing the business purpose.
Organize your documents chronologically and create a clear narrative. Don’t just dump a box of receipts on them. Instead, prepare a summary sheet that explains each document and how it supports your tax position. This approach demonstrates good faith and makes the auditor’s job easier, which often works in your favour.
Keep original documents safe and send copies unless specifically requested otherwise. The IRS rarely needs originals, and losing them during the audit process creates unnecessary headaches. If you must provide originals, get a receipt from the IRS acknowledging what you submitted.
Know Your Rights During the Audit Process
The IRS must treat you fairly and explain their findings clearly. You have the right to understand why they’re examining specific items, why you’re being audited, and what additional information they need. If something confuses you, ask questions. Auditors are generally helpful when taxpayers cooperate and communicate openly.
You can have representation present during any IRS meetings. This includes CPAs, enrolled agents, or attorneys who can speak for you while being audited. In many cases, you don’t even need to attend the audit yourself if you have proper representation. Your representative handles the entire process while you go about your normal business.
The IRS must conduct audits at reasonable times and locations. They can’t show up at your business during your busiest hour or insist on meeting at inconvenient times without good reason. Office audits typically occur at local IRS offices, while field audits happen at your home or business.
You can request additional time if you need it to gather documents or consult with a professional. The IRS usually grants reasonable extension requests, especially if you’re making good faith efforts to comply. Don’t abuse this right, but don’t hesitate to ask when you legitimately need more time.
Working With Tax Professionals
Consider hiring help to prepare yourself whenever you get audited. CPAs and enrolled agents understand IRS procedures and can often resolve issues quicker than you can alone. They know what documentation the IRS considers acceptable and can present your case in the best possible light.
Choose representatives with audit experience. General tax preparation experience doesn’t automatically translate to audit expertise. Ask potential representatives about their audit experience and success rates. Some specialize in specific types of audits or industries.
Understand the costs upfront. Most tax professionals charge hourly rates for audit representation, and costs can add up quickly. However, professional representation often saves money by resolving audits faster and achieving better outcomes than self-representation.
Understand Common Audit Triggers
High-income taxpayers face increased audit scrutiny, particularly those earning over $200,000 annually. The IRS assumes these returns have greater potential for errors or underreporting, so they examine them more frequently.
Disproportionate deductions relative to income often trigger audits. If you earn $50,000 but claim $20,000 in business expenses, expect questions. The IRS computers flag returns where deductions seem unusually high compared to reported income.
Business owners encounter specific triggers that employees rarely face. Cash-intensive businesses, significant business losses, and complex business structures attract attention. Common IRS triggers related to ROBS plans include improper documentation, personal use of business assets, and failure to follow required procedures for these retirement-based business funding arrangements.
What Happens After the Audit Concludes
The IRS will send you a report explaining their findings. This might show no changes to your return, additional taxes owed, or even a refund if they find errors in your favour. Review this report carefully and compare it to your records and expectations.
If you agree with the findings, sign the report and pay any additional taxes, interest, and penalties. The IRS offers payment plans if you can’t pay the full amount immediately. Setting up a payment plan prevents more serious collection actions and reduces additional penalties and interest.
If you disagree with the results, you have the right to an appeal. The IRS appeal process is independent from the original audit, and appeals officers often have more flexibility to negotiate settlements. Many cases resolve favourably at the appeals level without going to court.
Stay Prepared for Future Peace of Mind
Keep better records going forward. Good record-keeping prevents most audit problems and makes any future audits much easier to handle. Invest in a simple filing system and maintain it consistently throughout the year.
Review your returns with a fine-tooth comb before filing them. Many audit triggers result from simple errors or omissions that careful review would catch. So if you find yourself being audited by the IRS, what are you going to do? Don’t panic and read through these notes carefully!
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