Defending yourself during an Internal Revenue Service audit can be a time-consuming, stressful affair — but audits aren’t too common. In fact, just 0.25% of all returns are typically audited by the IRS, according to the Government Accountability Office. Keeping good records and maintaining organized documents is crucial to protecting yourself if you do happen to be one of the unlucky few. The trick is knowing what records to keep and how long to keep them. In the event of an IRS audit, here’s what you need to know about which documents you need and which receipts to save for filing your taxes.
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What Is a Tax Audit?
So, what is auditing? A tax audit is a review of your accounts and financial information by an IRS agent or state auditor to make sure you correctly reported your income, expenses and credits in accordance with tax laws. The IRS can randomly select tax returns to audit so it’s not always clear why you’re being audited. But still, you should generally keep tax-related documents for at least three to six years from the date you filed your return, according to the IRS.
Documents You’ll Need To Defend Yourself During an Audit
To defend yourself during an IRS tax audit, you’ll need documentation for what you claimed on your return. “If a filer can have any and all tax-related documentation organized prior to completing his or her return, it will help to save time, stress and uncertainty about the information being included,” said Andrew Oswalt, certified public accountant and tax analyst for TaxAct, a tax preparation software company.
Whether you bank online or receive hard copies of your bank account statements, keep all relevant proof of what you spend and where. In addition, save the following information because they are the documents needed for an audit and that the IRS most likely will request. Here are the documents you should have ready in case of a tax audit:
- Receipts: Receipts prove what you spent your money on, so keep bank account and credit card statements, retail receipts and donation receipts from charitable organizations.
- Bills: You can show you paid bills through ATM, credit card and debit card receipts, or you can provide the actual bills for which you claimed deductions.
- Canceled checks: Keep canceled checks you’ve written to pay for a home or fees associated with the sale of a home, renovations and nondeductible contributions to an individual retirement account. Also save canceled checks you’ve used to pay for charitable contributions, tax payments and alimony for at least the last six years — seven if you claimed bad debt or filed a fraudulent return.
- Employee documents: Make sure to hold on to information about dress codes, continued education and W-2 reimbursement statements or policies.
- Legal Papers: Depending on what applies, be sure to keep divorce settlements, including custody agreements, property acquisition, criminal or civil defense papers, and tax preparation.
- Loan agreements: In addition to your home mortgage loan documents, keep any paperwork associated with a second home and personal, business and car loans, even if they’re paid off. This kind of paperwork is good to keep even if you don’t get audited — just in case you have a loan dispute down the road.
- Logs: If you’re claiming a mileage deduction for business, moving, medical or charitable purposes, you’ll need to keep a trip log. In addition, you might need a log for your gambling winnings and losses if you’re writing them off.
- Medical and dental records: This can include medical savings account statements, physician statements and a contract for attendant care among other things.
- Theft or loss documents: You will need to provide all information related to a theft or loss incident, which can include insurance reports or an appraisal from a qualified adjustor.
- Tickets: Save tickets, which can include business trip travel tickets and receipts.
- Schedule K-1: This is used to report your share of a partnership’s income, deductions and credits.
Without records for an IRS audit, you can’t prove you’re entitled to the deductions you claimed. Make sure you have good records, or the IRS could prevail in an audit.
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Types of Tax Returns That Get Selected For an Audit
The IRS uses different methods to figure out which returns to audit. It uses statistics to determine the “normal” range for various credits and deductions that people in similar life situations take. Computer programs compare your return with that range, and if yours is significantly different, you might be audited. The IRS might also decide to audit your return if it’s investigating related taxpayers, such as your business partners. In addition, the IRS can randomly choose your return for an audit.
If your return is selected for an audit, an auditor reviews it first. If he finds something questionable, he forwards it to an examination group. Next, you’re notified by mail that you’re being audited. If anyone calls you to tell you you’re being audited, it’s a scam; the IRS never initiates an audit via phone.
How To Defend Yourself During the Tax Audit Process
An IRS tax audit can take the form of a personal interview, or it can be conducted by mail. Prepare your tax audit defense by gathering documents to support the information on your tax returns if you receive an IRS audit by mail. Having no documentation for a tax audit could mean a long audit process.
During the IRS audit process, your accounts and financial information will be examined to ensure you reported your information correctly and legally. Providing documentation for every deduction you claim is the best thing you can do to defend yourself.
If your audit takes place in person, it might be conducted at an IRS office or your home, place of business or accountant’s office. Here are five basic rights you have during the audit process, as outlined on the IRS website:
- Professional and courteous treatment by IRS employees
- Privacy and confidentiality regarding your tax matters
- Knowledge about why the IRS is asking for information, how the IRS will use it and what will happen if you do not provide the requested information
- Self-representation or representation by an authorized individual
- The option to appeal disagreements, both within the IRS and before the courts
An audit concludes in one of three ways:
- No change: No changes result because you have provided evidence of all items.
- Agreed: The IRS proposes changes and you agree.
- Disagreed: The IRS proposes changes and you do not agree.
You can request further review by a manager if you disagree with the audit findings, or you can attempt mediation with the IRS or file an appeal.
You might want to get in touch with the Taxpayer Advocate Service, an independent organization within the IRS. TAS protects your rights and might provide free help for tax problems you can’t resolve yourself. Taxpayers who can’t afford to be represented by an IRS tax attorney during an audit might be eligible for representation by an enrolled agent at a low-income taxpayer clinic.
Minimize Odds of an Audit
Because the IRS sometimes randomly selects some returns to audit, there’s no way to completely audit-proof your return. But following these simple tips can go a long way toward reducing your chances of getting audited.
The IRS includes falsely padding deductions as one of its “dirty dozen” tax scams. If you’re entitled to a deduction or credit, take it — but don’t report extra deductions like charitable contributions you never made or business expenses that were really personal costs, because you’ll be asking for trouble.
Double Check Your Math
“When completing a return, filers should double-check all information to ensure the numbers that were entered on the form match what was reported on the tax document or receipt,” Oswalt said. “The IRS’s automated system will detect any discrepancy, and unfortunately, it does not know if it was a mistake or purposeful.”
You might want to consider using computer software to calculate your return. It would reduce your chances of making an error, and some tax software programs are free.
Get Professional Help
If your taxes are complicated or you just don’t feel comfortable doing them yourself, paying a professional for tax audit help might be a worthwhile investment. Before committing to this option, check the preparer’s qualifications and history with the Better Business Bureau, the IRS suggests.
Retain Long-Term Financial Records
If you don’t know how long to keep your tax records, you should keep for at least six years in case the IRS claims you underreported your income by 25% or more. Typically, the audit window is only three years, but if you underreported your gross income by 25%, the IRS has six years to audit you.
Invest In a Paper Shredder
To prevent identity theft, consider purchasing an inexpensive paper shredder to destroy documents that contain your Social Security number, bank account information, investment account or credit card numbers or other personal information.
Being Organized Pays Off
Organizing your records and storing your tax returns and bank statements for an IRS audit takes a bit of time, but it’s worth the effort. If you’re audited, you’ll have everything you need at your fingertips and it can help make the audit process run smoother. To effectively prevent a tax audit you’ll need to be prepared.
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Daria Uhlig and Taylor Bell contributed to the reporting for this article.