How to Deal with an IRS Audit

Tax season is difficult enough in a normal year, but what are you supposed to do when the IRS comes knocking? What should you do to deal with an IRS audit? If you’re prepared and know what to expect, things will go more smoothly.

Important Recommendations

Above all else, there are three things you need to keep in mind to appropriately handle an audit:

1. Prepare for an audit while you’re preparing your tax return. That’s the best time to start, when everything is still fresh and you know where everything is. Whether or not you actually get an audit, build a file that supports each piece of income and every deduction that you claim. If you do get an audit notice, it’ll be easy for you to pull out your files and go over your tax information, instead of having to frantically scramble to find the supporting records you need. In fact, many inquiries can actually be resolved through the mail, particularly when your initial response is complete.
2. Read the explanation of your rights and make sure you understand them. When you’re audited, you’ll also receive a statement of your rights, including the right to prompt, courteous, and impartial treatment; the right to a reasonable amount of time to produce any documentation that is requested; the right to get copies of your tax return from the IRS; and the right to have your audit tape-recorded. If you encounter any difficulty when you try to exercise these rights, contact the Office of the Taxpayer Advocate.
3. Stick to the questions asked, and don’t make passing remarks. When you get an audit request, only bring documentation connected to the items that were specifically requested. Don’t make the mistake of bringing additional material or accidentally mentioning something in passing that might lead the IRS to expand the scope of the audit. If there’s anything in the notice that you don’t understand, consult a professional.

Related: Tax Treatment of Tipped Employees

If You Get a Negative Report

The burden of proof in an audit is on you: it’s up to you to be able to document and justify your income and deductions. If you can’t do that, you’ll get a negative report on the audit. What do you do then?

First, read the conclusions made in the report. If you disagree with them, your next step is to speak with the IRS agent’s group manager. If the problem still isn’t resolved at that level, you can go before the IRS Appellate Division for a conference. Each time you go to a higher level, though, it takes time and requires additional preparation, so it’s best to resolve any issues at the lowest level possible. On the other hand, if you can’t get resolution at lower levels, the people you’ll deal with at the appellate level have more power to negotiate and work out a solution.

If, however, your appeal fails, you’ll get a notice of deficiency, giving you 90 days from the date on the letter to either file a petition with the tax court or pay the tax. If you file the petition, your case will go before a tax court judge; if you pay the tax, you can still sue for a refund in U.S. District Court, where your case will go before a jury.

Related: 10 Tax Planning Tips

Another option is to make “offer in compromise.” If you meet the criteria (Doubt as to Liability, Doubt as to Collectability, or Effective Tax Administration), the amount you owe can be reduced to an amount that you’re able to pay, along with an extended payment period.