Most of us file and pay our taxes faithfully each year, and that's usually the only time we interact with the Internal Revenue Service. That's not the case, however, for some unlucky individuals. Statistics from the Treasury Inspector General for Tax Administration show that 1.48 million taxpayers were invited to spend a little extra quality time with the IRS last year because they underwent an individual audit.
If you receive a notice that the IRS is going to audit you, don't panic. There are simple ways to prepare yourself and your financial information to make the process go more smoothly. An audit doesn't have to be the traumatic experience everyone imagines it to be.
'Greetings from the IRS'
The IRS will notify you of an impending audit by telephone or snail mail. The IRS does not use email to contact taxpayers.
But don't pass out if the IRS contacts you. If you made a minor mistake — such as simple math errors, omitted items, transposed Social Security numbers or entries that don't match (W-2s, 1099s or 1098s) — the IRS may simply request a correction or explanation by mail. The IRS will send you a notice advising you it has recalculated your tax. You may be asked to submit additional documentation to back up amounts reported on your return.
According to the IRS, requests for documentation or more information rarely lead to full audits. Simply respond to the notice and send the requested information.
An in-person audit
The IRS may opt to conduct an in-person audit at your home or your representative's place of business. Audits may be random, or they may be triggered by something out of the ordinary on your return.
In most cases, the IRS will send you a notice requesting that you call and set up an appointment with an agent. Once the appointment is set, the agent handling your case will send a letter advising you what documents he or she will need at review. Additional information may be requested at the time of audit or afterward.
Remember, even if you did not personally prepare your tax return, your signature means you are responsible for all of the information on the return.
There's no formula for determining who will be audited and who won't. Some returns are selected for audit through computer screening. The system scans for unexplained changes and variations from averages in your income bracket or ZIP code. When the computer finds a variance, the proverbial red flag goes up. Sometimes, though, you're just selected randomly.
Contact your CPA or other tax preparer. If your return was prepared by a CPA or other tax preparer, you should contact them as soon as you receive a notice of audit from the IRS. The person who prepared your return can advise you of the process used in preparing your return and can advise you on issues the auditor may focus on.
Your preparer has a stake in your audit, as it's his or her work that may be called into question. CPAs and enrolled agents are qualified to represent you before the IRS.
Be timely. Respond promptly to the IRS, including answering requests and providing information.
Be organized. Find out what information the IRS is requesting, then collect and organize the data. The more prepared you are, the more smoothly the audit is likely to go. If you need extra time to gather information, advise the IRS immediately.
Be in the know. By law, the IRS has three years to audit your return. Even if your most recent return is the subject of the audit, be sure to go back over your records and familiarize yourself with the contents.
Be quiet. Provide only the information requested. Period. Do not volunteer additional information. Discuss your audit only, and only answer the questions asked of you. Answer questions honestly but briefly. Avoid small talk.
Check their work. Carefully review any penalties for errors. The IRS makes math mistakes, too.
Be stingy. Never give the IRS the only copy or the original of a document.
Don't sign too soon. Don't sign anything until you fully understand the document and agree with what it says. If you want to consult with your CPA prior to signing anything, you have that right. Obtain copies of information in their files or copies of anything that you sign.
Know your rights. Don't be afraid to speak up if you need help. If you're in the middle of an audit and find that you are missing some documents or would like to speak with your CPA, you can stop the audit and reschedule it. If you experience conflict with the agent conducting the audit, you can ask to speak to his or her supervisor.
Know your options. If and when the IRS agent presents you with a bill, you have the option to agree and sign the document or to disagree and request a hearing with an appeals officer. A CPA can help you decide what's best for you.
For more information about Pennsylvania Institute of Certified Public Accountants (PICPA), visit www.ineedacpa.org.