As you’re working on your 2016 tax return, you might consider what would happen if you were audited. It’s widely accepted that most people would be alarmed at being notified that the IRS intends to audit their tax returns. However, most of us will never find out as only a small fraction of individual tax returns are audited each year. Of these, the majority are correspondence audits, while the rest are field audits.
Yes, an IRS audit is inconvenient, but it’s hardly a catastrophe. If it should happen to you, it’s helpful to know what you can do to avoid complications and make the process go more smoothly.
One Step At ATime
If your return is selected for audit, here are the first things you should do:
Stay calm. Your tax return may have been chosen at random, or the IRS may simply need more information. It is not an indication that you’ve done something wrong or are suspected of foul play.
Don’t ignore the notice. Most IRS correspondence include a deadline by which you’re required to respond. Contact from the IRS regarding an audit will be made either via phone or mail, with a follow-up letter. (The IRS will not contact you via e-mail to notify you of an audit.) If you received a letter, you will see a number in the upper right corner designating the reason for the correspondence. For example, Notice Number CP05A indicates that the IRS is examining your return and needs additional documentation.
Gather information. Once the focus of the IRS examination is clear, begin gathering the information you’ll need to respond properly. This may include invoices, canceled checks and receipts, as well as your tax return for the year(s) in question. You should always retain a copy of any documents you submit to the IRS.
While it’s important to provide the information requested, it is not advisable to offer additional information (not requested). Doing so may generate additional (unwanted) questions.
Getting Professional Help
Engaging a tax professional to represent you is a worthwhile consideration. The professional’s experience with the audit process should enable him or her to know/limit what information should be provided and how to answer questions appropriately, without inviting further investigation.
The tax expert can also review any documents you’re asked to sign. This can be valuable whether you’re responding in person or via a letter. Finally, having an advocate handle the audit reduces the time you need to spend and can shield you from any undue stress.
What Changes to Expect
It’s fairly common for an IRS examination to conclude with at least some changes. Even so, often there is no change to the tax liability as originally filed. In some instances, the examination results in the IRS actually owing money to the taxpayers.
If you do owe something, you’ll be assessed interest, and, potentially, penalties in addition to the tax. In some situations, penalties can be abated if it is shown there was reasonable cause for the tax deficiency.
If you disagree with the changes proposed by the IRS, you can appeal the decision through the IRS’s Appeals Office — or you can take your case to tax court. IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree, explains your rights to appeal and the proper procedures.
Knowledge Is Power
When confronting any fear, knowledge is power. Understanding how the audit process works can help it flow much more easily, causing much less aggravation. And of course, consulting a tax expert as soon as you hear from the IRS about a potential audit is the first step toward handling this improbable event without negative consequences.