Top Ten Tips for Surviving an Audit

In an audit, you must convince the IRS that you reported all of your income and were entitled to all credits, deductions, and exemptions. If you're facing a tax audit, here are the top ten tips for dealing with the IRS.

Tip #1: Find Out What You'll Need to Do

Again, in a tax audit, you must convince the IRS that you reported all of your income and were entitled to any credits, deductions, and exemptions that are questioned. IRS Publication 17, Your Federal Income Tax, explains the audit process—from the IRS point of view.

When you prepare for an audit, start by reviewing the tax return being audited. If a tax pro prepared the return, go over it with the preparer. If you prepared the return yourself, review it with a tax professional to find out if they foresee any problems. You'll have to show the auditor where the data on the return came from.

You might consider hiring the tax pro to represent you, depending on how much you can afford and your overall comfort level in dealing with the IRS. A tax professional should be able to give you an educated guess about why you're being audited. You can then prepare your audit defense accordingly.

Tip #2: Delay When Possible

Postponing the audit usually works to your advantage. Request more time whenever you need it to get your records in order or for any other reason.

Tip #3: Don't Host the IRS at Your Business or Home

Keep the IRS from holding the audit at your business or home. Instead, go to the IRS or have your tax pro handle it. Field audits (at your place) are used mainly when there is business income. Consult a tax professional before hosting a field audit.

Tip #4: Prepare Your Records

Organize your records logically and clearly according to the deduction category. Include totals of receipts for each classification, such as rent, travel, and utilities. If the totals don't match the numbers on your tax return, be ready to explain why.

If you're missing receipts or other documents, you're allowed to reconstruct records. Try to organize all records the auditor might ask for before the audit. Organization can impress an auditor that you are conscientious.

Tip #5: Manage Your Expectations

Don't expect to come out of the audit without owing something—the odds are against you. The average adjustment for an office audit (held at the IRS office) is $4,000; the average adjustment for a field audit is $17,000.

Ask the auditor about disallowances they are considering, and defend your position. Don't try to negotiate the amount of taxes to be paid. Instead, negotiate tax issues—for example, whether a certain deduction should be allowed. Also, don't negotiate by telling the auditor you can't pay the bill—that's not the auditor's concern.

Tip #6: Don't Answer Unless Asked

Give the auditor no more information than they're entitled to, and don't talk any more during the audit than is absolutely necessary. Auditors often get damaging information from taxpayers who voluntarily provide answers to questions that weren't asked. The six best responses to a question posed by an auditor are:

• Yes.
• No.
• I don't recall.
• I'll have to check on that.
• What specific items do you want to see?
• Why do you want that?

But don't lie to or mislead an auditor. IRS examiners are trained to ask for information they already have to test your credibility.

Also, don't give copies of other years' tax returns to the auditor—if you do and they see something they don't like, they will make adjustments in those years, too. In fact, don't bring to an audit any documents that don't pertain to the year under audit or weren't specifically requested by the audit notice.

Your audit letter includes a list of things to bring. Don't take anything else unless it supports a deduction you missed when you filed your tax return.

Tip #7: Read Up

Research tax legal issues by using free IRS publications and commercial tax guides. If you're still unclear about the tax law or how to present your documents to an auditor, consult a tax pro before the audit.

Tip #8: Learn About Your Rights as a Taxpayer

Browse IRS Publication 1, explaining the Taxpayers' Bill of Rights, before your audit. Again, if you have questions about tax law or how to present your case or documents to an auditor, talk to a tax pro before the audit.

If the audit isn't going well, demand a recess to consult a tax pro. Ask to speak to the auditor's manager if you think the auditor is treating you unfairly. If the subject of tax fraud comes up during an audit, don't try to handle it yourself.

Tip #9: Time Is On Your Side

The IRS generally must complete an audit within three years of the time the tax return is filed. So, if you filed before the due date, April 15, the three years starts running from April 15 of the year it was due. However, this general rule has a few exceptions:

• If you understate your income by 25% or more on your tax return, the audit deadline is extended to six years.
• If you file a fraudulent return, there is no time limit on an audit. Tax fraud is conduct meant to deceive the IRS, such as using a false Social Security number. A really big mistake, if done negligently, not intentionally, isn't fraud. The burden of proving fraud is always on the IRS. And the IRS seldom audits returns after three years even if fraud is suspected.
• The audit time limit, called a "statute of limitations," starts to run only if and when you file a tax return. Nonfiled tax years are always open to audit. If, however, you haven't filed and haven't heard from the IRS within six years of the due date of a tax return, you have probably escaped the audit net.

Audit notices are usually mailed between 12 and 18 months after you file your return. So, generally, if you haven't heard from the IRS within 18 months, you won't be audited. IRS audit notices are sent by first-class mail and not by email or telephone contact.

Tip #10: Appeal the Results

When you get the examination report, call the auditor if you don't understand or agree with it. Meet with the auditor's manager to see if you can reach a compromise. If you can't live with an audit result, you may appeal within the IRS or go on to tax court.

Getting More Information

For detailed information about IRS tax audits, see Stand Up to the IRS by Frederick W. Daily and Stephen Fishman (Nolo).