How To Handle a Tax Audit — And When To Hire Help

There are few things that strike more fear into the heart of the average taxpayer than the words “IRS audit.” The thought of facing down an IRS auditor and having to explain your entire financial life can be intimidating for anyone, and having to pay additional taxes, fines and penalties is also an unnerving thought.

The good news is that taxpayers can often manage an audit on their own.

Keep reading to learn how to handle an audit — when to call in a pro.

The most important thing to do when you receive notice of an IRS audit is to not panic. An IRS audit is not a judgment of how you run your finances. It’s simply an examination by the IRS to make sure you’ve correctly reported all of your income, complied with tax laws and paid the correct amount of tax you owe. In other words, if you’ve filed your tax return correctly, reported all of your income and claimed only legal deductions, you won’t have anything to worry about. Taxpayers can and do come away from IRS audits without owing any additional money whatsoever. Some even get a refund.

There are many different types of IRS audits. In some cases, you might not even know that you were technically “audited.” This is because the vast majority of IRS examinations are not field audits, which is the in-person IRS audit many people fear. Rather, in many cases, the IRS simply mails out a “math error notice” which indicates that you have not made proper calculations on your return. Other audits are correspondence audits, in which the IRS simply mails you a letter requesting additional clarification about your return.

The IRS will mail you a math error notice if it corrects a calculation error in your return. The notice tells you whether the correction results in tax owed, a change in your refund amount or no change:

If you agree with the IRS’ corrections, you don’t have to do anything besides pay any additional tax owed. If you don’t agree, you can dispute the adjustment within 60 days. The IRS will reverse the adjustment, but if you can’t reach an agreement, the case gets escalated and the IRS will begin deficiency procedures.

If you’ve received notice that you’re being audited by correspondence, the IRS Taxpayer Advocate Service, an independent organization within the IRS, recommends using the tool on the service’s homepage to search your notice number for more information about what the notice means. The site has a also roadmap that shows where in the IRS process the notice falls.

According to the American Bar Association, most audits focus on a single area of the return, such as itemized deductions. If that is the case with yours, the request pertains to a single year and you can document the information in your tax return, you can probably handle the correspondence audit on your own.

If you’re being audited, it means that the IRS doesn’t have all of the information it needs, or the information it does have doesn’t match what you’ve submitted. The agency will provide specific instructions on how to respond. Gather any documentation it requests, such as proof of income, expenses or itemized deductions. Send only what the IRS requests.

An audit by mail is usually much less onerous than having to meet with an agent in person. However, the burden will be on you to ensure you’re providing all the information the IRS requires. Double- and triple-check any correspondence you receive from the IRS to make sure that you’re complying with all of its requests.

If you’re called for an IRS field audit, you should be prepared to answer direct questions from the auditor. In-person audits are typically more thorough than correspondence audits. In addition to simply reviewing the documentation you provide, the IRS auditor will likely ask you follow-up or ancillary questions to get a fuller picture of your income and expenses. Again, there’s no need to panic if you aren’t hiding anything, but you should be prepared to answer deeper questions about your finances.

You may represent yourself at a field audit. However, doing so can be tricky. Failing to fully comply with IRS requests will make a bad situation worse, but so might volunteering information you’re not required to provide.

Although the IRS generally has the final word when it comes to your taxes, you do have the right to appeal the results of an IRS audit. However, time is of the essence. You’ll typically have 30 days to appeal any proposed adjustments to your tax return by the IRS. If you don’t get your appeal back to the IRS in time, your case is usually considered closed.

If you’re intimidated, overwhelmed or just unfamiliar with the IRS audit process, you might consider using outside help to get you through it.

You also might seek the advice of a tax pro if any of the following situations apply:

• You’ve filed a fraudulent tax return
• You need help writing letters and other correspondence
• The IRS is questioning information from more than one tax return
• The issue is a complex one that might affect multiple parts of your return
• You have an upcoming tax return due that will be impacted by the outcome of the current tax issue
• The audit might’ve been prompted by previous tax problems
• You’re not sure your records are complete or that you’ve fully satisfied the requirements listed in your IRS notice
• You want to appeal an IRS decision
• You agree with an IRS decision but need representation to negotiate a payment arrangement
• You want preparation or representation for a field audit

The good news is there are usually lots of options if you’re in need of assistance. Your CPA is probably the best choice, if applicable. If you file your taxes on your own electronically, many services offer free or low-cost audit assistance as well. For more serious situations and those that could result in a burdensome liability, consider hiring a tax attorney who can advocate for you and negotiate on your behalf.

If nothing else, an IRS audit is a learning experience. Since most people don’t want to go through an audit again in the future, take note of what the IRS was looking for in your return, and what additional information it may have requested. Some taxpayers are simply out of luck, as certain types of returns just tend to get audited more frequently, even if all of the deductions claimed are legitimate. If you regularly take very large deductions in relation to your income, claim bad debt deductions or continually show losses in your business, for example, you may get audited more regularly. But if you simply made some math errors or overlooked a small 1099, for example, learn from the experience to be more diligent in the future if you want to avoid another IRS audit.

Daria Uhlig contributed to this article.