Wouldn’t it be great if I could provide the steps for people to follow each year to guarantee an audit-proof tax return?
Well taxpayers can take some measures to decrease the likelihood of an audit from the Internal Revenue Service: First be honest about statements of income and taking deductions. Then check and recheck the math. Be sure to sign on the dotted line.
Still, that doesn’t guarantee someone won't face an audit.
The IRS chooses tax returns for auditing by computerized screening, random sampling or document matching. It's not possible to predict when a taxpayer's number will come up.
But if it does, there’s no reason to panic.
An audit doesn’t automatically mean the IRS thinks the person is dishonest.
Many audits result simply because the IRS found discrepancies in a tax return or someone made a math error or transposed a figure in a child’s Social Security number. In those cases, the audit, like most, will be conducted by mail. It may take a few exchanges between the taxpayer and an IRS agent, but the process should be fairly straightforward.
Should the IRS have more serious questions, an agent may want to conduct an in-person interview at the IRS office or the taxpayer's place of business.
In either case, it’s important to take the following steps.
Related: So You're Being Audited. Now What?
1. Carefully review the IRS letter.
The notice from the IRS will come in the mail, not by phone or email. It will identify items on the return that are in question and will request sharing specific documents. The taxpayer typically has 30 days to respond. It's best not to delay because if money is owed, the debt will continue to accrue until the issue is resolved. Before the taxpayer responds, though, he or she would be wise to contact a tax preparer or a certified public accountant for advice.
2. Gather your documents.
As a general practice, keep good records year-round. Bills, receipts, mileage logs and other information should be organized, filed and easy to retrieve. Compile a summary of income and expenses used to prepare the return and collect supporting documents for any potential audit.
If certain paperwork can't be located, ask for duplicates. For example, contact doctors’ offices for copies of medical expenses. An employer can reissue W-2s or 1099s. Don’t provide more than the IRS requests, and don’t furnish original documents. Make copies. If any documents are computerized, they can be shared on a flash drive. Just be sure the software is compatible with the IRS' software.
3. Contact a tax professional.
A taxpayer has the right to be represented in an audit by an enrolled agent, an unenrolled preparer who prepared the return, an attorney or a CPA. For audits by mail, the taxpayer might want to just contact her tax professional for advice and guidance.
For in-person audits, it’s best to have a tax professional go with the taxpayer or appear in his or her stead. An enrolled agent or CPA understands the complicated U.S. tax code and is savvy about the audit process. He or she knows that each question from an IRS auditor has a purpose and is equipped to answer those questions in the client's best interest.
Form 2848 (granting power of attorney) authorizes an individual to act on a person's behalf. Form 8821 lets that person to inspect and receive someone else's confidential tax information.
4. Treat the auditor with respect.
It's not a requirement to like the fact that an audit's taking place but be professional and respectful. Every taxpayer wants the IRS to treat him or her fairly and without judgment. Act in the same manner with the IRS.
5. Be confident.
Don’t try to hide information but don’t be a fount of information, either. Answer only the questions asked. Be confident in responses. Remember, the tax return was thought to be correct upon its filing, and records support this contention.
Finally, consider this: Just because there's an audit doesn’t mean money will be owed to the IRS. Yes, an additional tax bill may result, but the IRS could also end up accepting the return as is or, hard as it may be to believe, issue a refund. And that’s a great way to conclude an audit -- with more money in the pocket.