Handling an IRS Audit

Every year, the IRS audits many taxpayers. In 2010, about 1.6 million were audited for the 2009 tax year. This represented 1.1% of all taxpayers. Many of those audited were high income earners. The IRS audits taxpayers for various reasons: some taxpayers are audited out of a random draw, some are audited because they have suspicious and red-flag transactions on their tax returns, and some are audited because they have items that do not coincide with the IRS’s cross-referencing system.

Most of the audits that the IRS undertakes are letter audits – the IRS sends a letter to a taxpayer asking them to mail back various support documentation for items in their tax returns. Besides the letter audits, the IRS can also conduct a physical audit at your office or business premises. They can also ask you to visit the nearest IRS office to provide various documentations to have your audit conducted.

If you happen to be one of the targets of an IRS audit this year, you should properly prepare and provide the information needed to avoid further investigations. Below are some tips that can help you go through an IRS audit successfully:

Preliminary Review of the IRS Letter to Understand what is Needed

The first step you will need to take when contacted by the IRS is to review what the IRS auditor is asking for and try to understand why they are asking for the documentation or further information. The IRS has a system that matches off entries that you indicate in your tax return with entries from third party documentations. Most letter audits from the IRS are sent due to a mismatch of information from this cross-referencing system. Therefore, check to see if you indicated the correct amounts in your tax returns or if you missed out on anything. Some inquiries are straightforward and by mailing the relevant documentation, the IRS auditors are usually satisfied.

Professional Help

From your preliminary review of the IRS audit contact, you can then determine whether you need some professional help from a tax attorney or from a tax preparer. If you do not have the information that the IRS is looking for or if you find the nature of the inquiry as too complex to figure out on your own, you can consult with a tax professional. The professional will help you draft a response to the IRS or will accompany you to the IRS office for a physical audit.

Do Not Volunteer Information

This is one area that many taxpayers fail in when undergoing an IRS tax audit. When you are asked for specific information by the IRS, only provide the specific documentation or answers that they are seeking. Providing more information only sets you up for further probing. This is another reason why you may need a professional to assist you while responding to the IRS.

Do not be too Quick to Pay

If the IRS determines that you have back taxes due from their audit, do not be in a rush to pay off the taxes. You can always negotiate your position. The IRS can be wrong and therefore, always ensure that you have verified the new standing (you can enroll the aid of a professional). You can always challenge the IRS in tax court if need be, and many taxpayers have indeed, won over the IRS in many cases.