A tax audit is the fear of every taxpayer and subject of comedians, TV shows, and social media posts. If you are well-prepared, you can make it go smoothly and increase the odds of a good outcome.
The IRS will assure you that you have been randomly selected for closer examination. You may feel totally unhinged, like you are entering Dante’s Inferno. For one New York man, an audit was the beginning of a five-month-long drama. He methodically gathered all his receipts and filled a box with documents to corroborate his business deductions as a self-employed writer. He heard stories from people who shared his predicament, such as one woman who was summoned to the IRS offices five times. Looking back, he is surprised that he was so smug about his preparations, even waving off his tax accountant with an offer to accompany him. He could handle it. Big mistake.
Losing sleep for two days before his initial meeting with IRS examiners, he was exhausted when he arrived at the IRS office. After passing through tight ground-floor security, he ascended a long escalator leading to another security desk as he towed documents in a cart behind him. He was greeted by an examiner with a shaved head — the bad cop, he decided. He rarely smiled. In a conference room, a second examiner, shorter and friendlier with shoulder-length hair — the good cop — took notes. Two examiners? He wondered, am I this important or in a lot of trouble.
It took three hours to learn his home-office deduction was in question. This time, he listened to his tax accountant, requested a second interview, and made sure his accountant was present. He had claimed 47.3 percent of his apartment for work. The examiner asked for proof of rent, actual floor plan, and square footage. A third meeting was scheduled.
At the third session, an IRS supervisor accompanied the bad-cop auditor. They went back and forth over business use of his apartment. A compromise was reached at 33 percent and the home office deduction was saved, to the great relief of the freelance writer.
What You Should Do When Audited
1 – Gather your documents. Start going through your records to find relevant receipts and documents. If you cannot find a document, request a duplicate. Auditors will not accept the excuse records are missing or lost. What documentation should you bring? Receipts, mortgage statements, brokerage account statements, and pay stubs or W-2 forms. You may bring record books to substantiate certain claims on your tax return. This is important if you are unable to document the items in question to the IRS’s satisfaction, things get a little more complicated. The IRS will propose changes to your tax return.
2 – Contact your accountant, who can explain the audit process and help you prepare. In addition to your accountant, you may need a professional tax lawyer as well.
3 – You can challenge the agent’s assessment and set up a conference with an IRS manager to further review your case, or you can request a formal appeals conference. Keep in mind that interest will accrue on any unpaid tax from the date you filed your return, including the duration of the audit process. Typically, it is not worth appealing unless you are relatively certain you will win.
As long as everything you claim on your tax return is factual, an audit should be no more than a minor inconvenience. If you are an honest taxpayer who knows what to do in the unlikely event of an audit, you should sleep soundly.
After the Audit
What happens after the audit? You will be notified of the findings. The auditor will explain any adjustment to you and/or your representative before finalizing the audit. Promptly contact the auditors if you have information that has not been considered, or if you believe a mistake has been made. They will discuss future filing responsibilities and answer any questions you have concerning the audit.