Although your chances of being audited are low — the IRS only audits about 0.5% of the tax returns filed each year — that still amounts to over 1 million Americans who get that unwanted notice from the IRS. Reasons for audits can vary from honest mistakes to intentional tax evasion or misinformation, and the way they are processed can range from a correspondence audit to an in-person meeting with an auditor.
If you’re in the minority who gets audited this tax year, it’s important to know what your options are and the best ways to handle the auditing process.
Last updated: Jan. 29, 2021
Why She Was Audited: Her Support Numbers Didn’t Match Her Ex-Husband’s Claims
Janice Lintz, a consumer education and travel writer, faced both a state and federal audit.
“Reportedly, my support numbers didn’t match my ex-husband’s claims on his tax returns,” she said. “But my numbers were provable by bank and wire transfer [statements].”
What the Process Was Like: ‘Terrifying’
Although Lintz knew she had the documents necessary to prove that her tax claims were correct, the experience of being audited was still nerve-racking.
“The process was terrifying,” she said. “I had to compile all my details. Luckily, I had already gathered most of the documents for my divorce and I anticipated an audit, so I was somewhat prepared.”
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Her Best Tip: Go Paperless for Easy Access To All Your Financial Statements
Having easily accessible financial records is a good way to prepare for a potential audit.
“I now download every credit card and bank statement, and became paperless,” Lintz said. “It is a lot easier to be organized when everything is in neat and tidy folders on my computer. I now scan all credit card receipts related to my work. I now also request copies of check deposits from the bank at the end of the year, because online accounts don’t include copies of the front and back of the checks I deposited, which I needed.”
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Why She Was Audited: She Reported the Wrong Income Accidentally
Human error is a common reason you could get audited. That was the reason Briana Marie Vinciguerra’s tax return was flagged by the IRS.
“I was audited due to an error that was made on my initial return,” she said. “The tax professional who entered my information accidentally typed in an income amount from the previous year. We did correct it; however, my refund was still held and I eventually received a letter that I was being audited.”
What the Process Was Like: Slow and Tedious
“It took nearly two months for me to even find out that I was being audited,” Vinciguerra said. “I had never received my refund and after about 30 days or so, I decided to do some investigating myself. Eventually, I did receive the letter about the audit.”
Vinciguerra said that even when she did receive notice that she was being audited, it wasn’t clear what next steps she was expected to take.
“I called the IRS myself, and eventually started working with the Taxpayer Advocate Service to speed up the process,” she said. “I had to gather a lot of documentation: grocery receipts, utility bills, letters from my daughters’ schools, my rental lease, previous year’s tax return, pay stubs from the previous year and letters from my daughters’ doctors stating that I was the parent bringing them during that tax year.”
Vinciguerra made a list of everyone she needed to collect documentation from, and scheduled times to pick up the requested information.
“I sent templates over to the schools and doctors to draft the letters requested by the IRS,” she said. “I dug through emails to find any old receipts I had from purchases I made for my household. I really had to get organized and work against a checklist to make sure the IRS was getting everything they needed in a timely fashion.”
Her Best Tip: Use the IRS’ Taxpayer Advocate Service
The Taxpayer Advocate Service is an independent organization within the IRS that protects taxpayer rights and helps with tax-related problems. If you’re audited, you can contact the service for assistance.
“The tax advocates were able to get information over to me quicker than the IRS did,” Vinciguerra said, “so I had a heads up on letters that were coming to me and what documentation I needed to gather.”
Why Her Client Was Audited: He Had a Non-Traditional Business That Caught the Attention of the IRS
Danielle Dryden, attorney and owner of Dryden Tax Resolution, LLC, recalled working with a client who works as a traveling magician and was audited for his Schedule C expenses. When calculating his taxes owed, he made an error in his calculations and filed incorrect information.
“My client did his best to provide [all of his financial] information to his tax preparer, but the information was incorrect and thus the returns were prepared erroneously,” she said. “Because my client has a rather non-standard business, the IRS immediately flagged the returns for audit.”
What the Process Was Like: It Involved Lots of Back and Forth
Before the case was passed along to Dryden, her client worked with his tax preparer to provide the requested receipts — along with a lot of documents and information that had not been requested — to the auditor for review. The auditor determined that the information was presented in a way that was too disorganized, and said that he would not be reviewing the materials until they were redone. At this point, the tax preparer handed over the case to Dryden to take over.
“Because there were thousands of receipts to sort and organize, I allowed the audit to close,” she said. “Once the audit closes, the IRS is required to provide 90 days for the taxpayer to petition to the United States Tax Court. Because I was still in the process of organizing the information, I allowed that 90 days to pass. The auditor then sends the case to a department called Technical Services where the balance is assessed to the taxpayer’s account, which takes approximately 45 days. Once the balance is formally assessed, the taxpayer can then begin the process of repaying the balance due.”
Dryden and her client then submitted documents to the IRS through a process called “audit reconsideration.”
“A taxpayer can utilize this strategy if there is new information to submit in response,” she said. “The IRS will ‘reconsider’ it and make adjustments to the assessed balance.”
Her Best Tip: Save Your Receipts
“This case is a perfect example of why it is incredibly important to save receipts and document all expenses,” Dryden said. “This particular client is in a very good position document-wise to get the balance decreased substantially. Had he not saved the receipts, there would be no way to prove the expenses, and they would be disallowed entirely.”
Why His Client Was Audited: He Had Multiple Income Sources
It’s not always clear why someone is audited by the IRS. This was the case with a client that worked with John Madison, a CPA and personal finance counselor at 60 Minute Finance.
“I think the client was audited due to his multiple forms of income across numerous companies he owned,” he said. “The agent didn’t specifically state this was the reason, but I suspect it was based on what they examined.”
What the Process Was Like: Cordial and Smooth
“Even though there were some complexities in his situation, the audit itself went smoothly,” Madison said. “We received the document request, pulled together the information [the auditor] wanted to see, then provided it to him when field work began.”
Madison credits three things with helping the process to go smoothly:
- “We didn’t approach the process like the auditor was our adversary. He had a job to do, and we gave him the information he needed without appearing to be hesitant or combative.”
- “We made ourselves available to help understand the information.”
- “Most importantly, we had documented the entries made. Proper record-keeping is vitally important, and it is done best — in my opinion — throughout the year. Building up support for the reasons a deduction was taken makes the auditor’s job much easier, which in turn makes the process smoother.”
His Best Tip: Treat the Auditor With Respect
“While an audit is never a fun process, the pain can be reduced by planning ahead and building proper documentation at the time of the transaction — not two years later when the returns are audited,” Madison said. “Treat the auditor with respect. And, of course, do your best to prepare the returns properly and in compliance with the tax code.”
Why His Client Was Audited: He Was Questioned About His Use of a Vacation Home
Enrolled agent Morris Armstrong represented a client who was audited for his Schedule E filing, which involved the rental of a vacation home. The IRS argued that Armstrong’s client had used the property for more than 14 days out of the month for personal use, rather than as a rental property, and therefore it should be classified as a mixed-use property rather than a rental.
“Claiming that the property was mixed-use instead of 100% rental changes the deductions considerably — and not in the client’s favor,” he said. “We had to substantiate that some of the days that [the client was there] were for business.”
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What the Process Was Like: It Was Done Entirely via Mail and a Phone Call
This case was a correspondence audit, done entirely via mail and a phone call.
“The IRS was looking at certain days that we had indicated were working days and wanted to reclassify them,” Armstrong said. “We presented the documentation that each trip had a business purpose, mainly interviewing people to do work or being there to supervise. The end result was that we presented the documentation supporting the visits and showed that they were not personal.”
The audit went smoothly because the client had all the necessary documentation on hand.
“The client had great records and we were able to show emails and contracts covering all of the dates,” Armstrong said. “I think it was dumb luck that the return got picked because the difference was just a few thousand dollars.”
His Best Tip: Don’t Ignore Letters From the IRS
You might think that audits are a major process — and they sometimes are — but some can be handled completely via correspondence.
“People should bear in mind that more examinations will be done through correspondence and will often begin with a simple notice,” Armstrong said. “Never ignore letters from the IRS.”
Why His Client Was Audited: They Failed to Report All of Their Income Received on Form 1099
Paul Joseph, an attorney, CPA and founder of Joseph & Joseph Tax & Payroll, once represented a client who was audited for incorrectly filing income information.
“The client failed to report all of the income they received on a 1099,” he said. “The actual 1099 came from a casino reporting a jackpot for $4,000. In addition to that, the return also contained a Schedule C business that had substantial revenues and expenses. The IRS scheduled an audit to review the 1099 for $4,000, and to review the cash receipts and disbursements on the Schedule C.”
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What the Process Was Like: Joseph Handled the Audit Without His Client Present
“The first thing I did was have the client sign a power of attorney, giving me authorization to deal directly with the IRS,” Joseph said. “I handled the audit without my client being present. I discussed issues on behalf of the client with the IRS by going through the schedules with them.”
Joseph said that he was able to reach an agreement on certain items during the initial audit, but that the auditor requested additional information for other items, including credit card receipts for certain expenditures. There were also items Joseph did not agree to on behalf of his client, and for those items he filed an appeal to discuss those items with an appeal officer.
“We were able to resolve the remaining differences contained in the audit with an appeals officer,” he said. “Once the appeals officer and I came to an agreement, the manner was referred to district council, who is the only person authorized to close the appeal. Once the file was reviewed by district council, then I, on behalf of the taxpayer, signed an agreement to close the file.”
His Best Tip: Hire an Attorney or Another Advocate To Represent You During an Audit
“The best thing to do if you’re subject to an IRS audit is to hire someone and authorize them to go to the audit,” Joseph said. “Never go yourself. In fact, my clients don’t go at all. It is my position that I never let my clients come to an audit because they are expected to know all of the answers immediately. By not having the client attend the audit, they’ll have an opportunity to discuss and fully explain the return with the hired professional prior to giving a response to the IRS.”
But really, the ideal situation is to not get audited in the first place. Click through to find out ways to prevent a tax audit.
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