When you’re working on filing your tax return, you might be wondering what would happen if you were audited. It’s fair to say that most Americans dread getting word that the IRS intends to audit their tax returns. In fact, it’s unlikely most of us ever will — only a small percentage of individual tax returns are audited each year. Of these, more than half are correspondence audits, while the rest are field audits.
But while an IRS audit is inconvenient, it’s hardly the end of the world. Just in case it happens to you, though, it’s good to be aware of some steps you can take to mitigate the difficulties and make the process go more smoothly.
First things first
If your return is selected for audit, here are the first things you should do:
Stay calm. Your tax return may have been chosen for examination randomly, or because the IRS needs more information. Receiving an audit notice doesn’t mean you’re suspected of cheating.
Don’t ignore the IRS. Most notices include a deadline by which you’re required to respond. Contact from the IRS about an audit will be made either via phone or mail with a follow-up letter. (The IRS doesn’t use email to notify taxpayers of pending audits.) If you received a letter, the upper right corner should include a number specifying the reason for the correspondence. For instance, Notice Number CP05A indicates that the IRS is examining your return and needs documentation.
Gather information. Once you understand the focus of the IRS examination, begin gathering the information you’ll need to respond appropriately. This may include invoices, canceled checks and receipts, as well as your tax return for the year(s) in question. Make duplicates of any documents you’ll need to provide the IRS, so you don’t hand over your only copy of a record.
While it’s critical to provide the information requested, you generally don’t want to offer additional data, such as tax returns from years falling outside the audit’s scope. Doing so may prompt additional questions.
Getting professional help
Consulting a tax professional is worthwhile. The professional’s experience with the audit process should enable him or her to know what information should be provided and how to answer questions appropriately, without inviting further investigation.
The tax expert also can review any documents you’re asked to sign — before you put pen to paper. This can be valuable whether you’re responding in person or via a letter. Finally, having an expert on your side can limit the time and stress of the audit.
What changes to expect
It’s common for at least some changes to occur as a result of IRS examination. That said, often there is no change to the tax liability as originally filed. And on some occasions, the examination ends with the conclusion that the IRS actually owes money to the taxpayers.
If you owe back taxes, how much can you expect to pay? The answer can vary widely. If you do owe something, you’ll be assessed interest and, potentially, penalties in addition to the tax.
Most audited taxpayers agree to any changes proposed by the IRS. But you can appeal the decision through the IRS’s Appeals Office — or you can take your case to court. IRS Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don’t Agree, explains your rights to appeal and the proper procedures.
Knowledge is power
As in dealing with any fear, knowledge is power. A better understanding of the audit process can make it flow much more easily, causing far fewer headaches. And of course, consulting a tax expert as soon as you hear from the IRS about a potential audit is the first step toward handling this unlikely event without any earth-shattering consequences.