10 Top Tips for Dealing With a Tax Audit

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.

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But there are many steps you can take to make the process of an IRS audit much easier to handle, and the first of these is to not panic. After all, the odds that you even get audited in the first place are extremely low. In fiscal year 2019, the IRS reported that it audited just 0.15% of all individual tax returns. But if you’re one of the unlucky few, here are some things you can do to deal with your IRS tax audit.

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.

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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.

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If you’ve received notice that you’re being audited, understand that the process won’t get resolved overnight. Especially if you are subject to a correspondence audit, you might have to exchange documents and information back and forth with the IRS for weeks, if not months. Be patient and meticulous. It’s critical that you take the time to thoroughly and accurately respond to any IRS requests.

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The heart of any IRS audit is information. Essentially, the end goal of an audit is to ensure that you and the IRS both have the same information about your finances. 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. To resolve the issue, collect all of the documents necessary to back up what you’ve filed on your tax return. This will include all of your W-2s, 1099s and other tax forms documenting your income. You’ll also need receipts and/or other documentation proving your legitimately claimed expenses. The more information you can collect, the easier the audit process will go.

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If you’re intimidated, overwhelmed or just unfamiliar with the IRS audit process, you might consider using outside help to get you through it. 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. If you’re just looking for general information on what to expect, ask your friends or relatives who may have gone through an audit themselves.

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If the IRS is conducting your audit through the mail, it’s 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 have any documentation that can further explain or validate the deductions you are claiming, be sure to include that as well. 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.

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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.

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Although you shouldn’t rush to the point that you omit vital information, you should respond to all IRS requests in a timely manner. Whether you’re replying to a correspondence audit or following up with information from a field audit, the clock is ticking when it comes to IRS audits. Any document requests will come with a clear deadline, so take note and make sure to respond in time. If you fail to meet any IRS deadlines, the IRS will assume you accept its interpretation of your tax situation and will assess any fines, penalties or additional taxes as applicable.

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Although the IRS generally has the final word when it comes to your taxes, you do have the right to appeal the results of any IRS audit. However, time is of the essence. You’ll generally 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.

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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.

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