Being well informed is the best way to ease the anxiety that comes with a letter from the Internal Revenue Service notifying you of a tax audit.
First, know your rights, spelled out in the IRS publication “Your Rights as a Taxpayer.” Those include the right to privacy and confidentiality, to professional and courteous service, to be represented by your accountant or other tax professional, to get help with unresolved tax problems, to appeals and judicial review, to be subject to only the correct amount of tax, and to relief from certain penalties and interest.
The notification will most likely specify one of the IRS’ three most common types of audit:
- A correspondence audit, handled entirely by mail, whereby the IRS seeks supporting documentation for an item on your return.
- An office audit, at a nearby IRS office, to review a few items on your return.
- A field audit at your home or business, with a thorough review of items on your return.
(Less common is the Compliance Research Examination audit, a comprehensive audit that may review your entire return, virtually line by line.)
You should respond to any audit notice by letting your accountant or other tax professional know about it, granting him or her a power of attorney to deal directly with the IRS. For the most part, once you’ve done that, your job is done. Your representative may have questions, or need your signature or more information, but he or she will handle the audit for you. Before the deadline given in the letter from the IRS, he or she will acknowledge receipt of the audit request and include a copy of your power of attorney. Timeliness is essential. All correspondence should be by certified mail or some other method that confirms that the IRS received your response.
If you’re subject to a correspondence audit, your accountant probably already has the documentation the IRS wants and will supply it by mail. In the case of an office audit, it may still be possible to address most issues by mail, at least in the beginning of the process. Don’t be surprised by a lag of several months after the documentation has been supplied. If a meeting is required, you can decide where it should be held. A neutral site, such as your accountant’s office, is both common and wise. If the proposed meeting time is not convenient, you may request another date and time.
If you’re selected for a field audit, you’ll be required to send the IRS more information, and you will have a higher probability of actually meeting an agent. Beyond that, expect just a more complex version of the audits mentioned above.
All requests for information from the IRS should be in writing, and you should seek clarification if a request is vague or unclear. Requested documents can include bank statements, canceled checks, closing statements, deposit slips, receipts, payroll tax filings, etc. It is in your best interest to provide everything requested and to organize it clearly. A commentary explaining certain items and calculations can also be helpful.
Even if you have provided all the information requested, the agent might still want to visit your home or office, and you have the right to schedule a convenient time. You are not required to attend the meeting, and often, it is better that you don’t. Your representative can handle the meeting and address any questions. After the review of the initial meeting and the office visit, the agent will likely come back with a request for more information or with proposed changes.
When the audit is complete, the IRS will tell you that you have no changes, that you are due a refund (yes, it does happen!) or that you have an additional new tax liability with interest and, possibly, penalties. If you agree with the agent’s findings, you will simply sign the form and the IRS will issue you a tax bill or a refund. If you do not agree, you will usually have 30 days to provide additional documentation, to request a discussion of the findings with the examiner, to ask to speak with the examiner’s supervisor or to appeal to the IRS Appeals Office. If you do nothing within 30 days, the IRS will notify you that an agreement was not reached, and that you have another 30 days to file an appeal before the findings become final.
Often, differences can be settled without expensive and time-consuming court trials. However, you may be able to take your case to the U.S. Tax Court, U.S. Court of Federal Claims or the U.S. District Court where you live. If you go to court, and if you have adequate records, have cooperated during the audit and meet certain other conditions, the IRS must prove certain facts in order to win its case.
Knowledge, professional support, preparedness and a hefty dose of patience are the best tools for going through an audit with a minimum of stress.