Prepare Yourself for an IRS Audit

Talk on the street is that the IRS is easing off on the number of audits performed. Does this mean you can go ahead and stretch the truth on your tax return and not worry about calling attention to yourself? Probably not. Call it fate, consider the possibility that maybe it's simply your turn, or keep in mind the fact that one reason the IRS can streamline its workforce is that computers are getting better at doing the job of picking out irregularities.

Whatever the reason, the possibility exists that your tax return may be selected for an audit. Some common reasons tax returns get audited include:

  • The deductions on your tax return are significantly higher than the national average for people in your occupation.
  • The income on your tax return is significantly lower than the national average for people in your occupation.
  • You've been audited before.
  • You're known to be involved in an illegal activity.
  • Your tax preparer has a reputation for preparing tax returns that are erroneous.
  • You deal in large cash transactions that have been reported to the government (financial institutions are required to report cash transactions in excess of $10,000).
  • It's your turn. Some tax returns are randomly selected for audit.

If your tax return is chosen for an audit, you don't have to move away and change your name. Instead, just get the audit over with and get on with your life.

Although there are a few different types of audits (a Correspondence Audit is done completely by mail or over the phone, and a Field Examination takes place at your place of business), the type of audit most people seem to loathe is the Office Visit. In this type of audit, you are summoned to appear before a real IRS person and bring various documents and receipts with you while you sweat and explain the numbers on your tax return. An Office Visit audit is about as much fun as speaking in public or finding a big spider in your bed.

For an Office Visit, the IRS sends you an invitation to appear at an IRS office near you, and you are expected to accept the invitation. One of the most important ways in which to prepare for this audit is to remain calm. All the IRS really wants to do is ask you some specific questions about the numbers on your tax return and see some evidence that those numbers weren't selected by throwing darts at the phone book or by using a similar scientific method.

If you have support for the numbers on your tax return, the audit may go quickly and smoothly. If there is some question about how you applied the tax laws, or if you can't produce documentation to support your numbers, or if you're afraid of being intimidated by someone speaking to you about the rules you should follow on your tax return, you can bring a tax professional or even a friend or family member to accompany you to the audit and do the talking for you. You can even send a tax professional in your place to an Office Visit audit.

Anyone representing you before the IRS must be armed with a Form 2848, Power of Attorney, signed by you and authorizing that person to represent you.

There have been stories in the past about people preparing for their audits by not bathing or changing their clothes for weeks before the event, in the hope that their appearance will be so disgusting to the IRS examiner that he will want to get the whole process over with as quickly as possible and will agree to anything just to get the taxpayer out of his office. Be aware that the IRS is on to this trick and that an unwholesome appearance will only work against you in an audit situation.

An excellent piece of advice, should you find yourself in an audit situation, is to keep your answers short and to the point. For example, if you're asked to explain the contribution deduction on your Schedule A, ask "Which contribution deduction?" and only produce a receipt for the deduction in question, rather than launching into a description of all the charitable activities in which you participate. When asked to produce a receipt supporting the income you report from a particular source, bring one document, such as a 1099 form, not all the check stubs you received and the checkbook register where you entered all your deposits. Never offer more information than that for which you are asked.

Behave cooperatively when dealing with the IRS agents. Belligerence and arrogance count against you. Treat the IRS agent with the respect you might afford your school principal. This is a person of authority who has the ability to make life unpleasant for you. You may be brighter than this person, or you may not like the person, but you still must be pleasant and courteous if you want to get the audit over with expediently. In additional a polite manner can go a long way toward getting the situation resolved in your favor.

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