How to survive a tax audit

Person going over audit documents

Audit. It’s a word that strikes fear in the heart of a taxpayer. While the process may seem scary, you may be able to sail through the review, nerves intact, if you’re prepared.

What to do when you receive a notice?

The IRS will always contact you by mail to notify you of an audit. In the letter, you’ll receive all information needed for complying with the request. Be sure to read and respond to the notice. You typically have 30 days to reply. If you fail to reply, you may increase the chances of the IRS taking unfavorable action against you. They may send you a bill for the full amount they believe you owe.

Another benefit of reading the notice carefully, is that you’ll have detailed information about what they’re looking for. If you’ve done a good job of tidying your tax files, you should have no problem finding the right records quickly.

The IRS auditor may ask to inspect your last three years’ tax returns. If the reviewer finds a major error, he may look back another three years and ask to see those detailed financial records, as well. The auditor may conduct the review by mail or in-person. Face-to-face interviews may be held at an IRS office, your home or tax advisor’s office.

What happens after you submit the paperwork? 

After the auditor receives all requested information, the examination begins. An audit is often completed in one of three ways:

  • No change: The auditor is satisfied with the information received from the taxpayer and accepts the tax return as correct or in no need of an amendment.
  • Agreed: IRS proposes changes to the tax return that the taxpayer understands and agrees with.
  • Disagreed: IRS proposes changes that the taxpayer understands, but disputes.

Know your rights 

If a meeting is required, it’s important to know your rights as a taxpayer before you go. They include:

  • The right to know why the IRS is asking for information.
  • How the IRS will use your information and what will happen if the information requested is not provided.
  • A right to representation, by yourself or an authorized representative.
  • The right to appeal audit disagreements.

IRS Publication 1 explains all your taxpayer rights and audit procedures.

At the conclusion of the audit if you agree with the findings, you’ll sign the examination report. If you owe the IRS money, that’ll be the time to work out a payment plan. If you disagree with the audit you can request a conference with an IRS manager, file an appeal or seek mediation.

Going through an audit can be a very stressful time. If you do have to experience the review, knowing what to expect may make the process a lot smoother.

The advice provided is for informational purposes only. Contact a tax advisor for additional guidance. 

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