Preparing for a Tax Audit

Preparing for an audit is sort of like preparing for a test in school: The IRS informs you of which sections of your tax return the agency wants to examine so that you know what to "study." The first decision you face when you get an audit notice is whether to handle it yourself or to turn to a tax adviser to represent you. Hiring representation costs money but saves you time, stress, and money.

Who can represent you?
The IRS permits three types of individuals to fully represent taxpayers before the IRS: enrolled agents, certified public accountants, and attorneys. All three are bound by IRS rules of practice. (Tax preparers can represent you at an audit but not in any appeals beyond that.)

If you normally prepare your own return and are comfortable with your understanding of the areas being audited, represent yourself. If the IRS is merely asking you to substantiate deductions, you'll probably do all right on your own. However, if you're likely to turn into a babbling, intimidated fool and are unsure of how to present your situation, hire a tax adviser to represent you.

Even if you choose to represent yourself and find yourself over your head in an audit, you've got a backup. At any time during the examination — such as when you feel a dizzy sensation — the Taxpayer Bill of Rights allows you to request that the audit be suspended until you have time to consult with either an enrolled agent, a certified public accountant, or an attorney. When you make this request, the IRS agent must stop asking questions or requesting documents until you are properly represented.



Documenting your claims
If you do decide to handle the audit yourself, don't wait until the night before to start gathering receipts and other documentation. You may discover, for example, that you can't find certain documents.

You need to document and be ready to speak with the auditor about only those areas the audit notice said were being investigated. Organize the various documents and receipts in folders. You want to make it as easy as possible for the auditor to review your materials. Don't show up, dump shopping bags full of receipts and paperwork on the auditor's desk, and say, "Here it is — you figure it out."

Don't bring documentation for parts of your return that ren't being auditied, either. You'd be creating more work for yourself; besides — you're required to discuss only those areas mentioned in the audit letter.

Whatever you do, don't ignore your audit request letter. The Internal Revenue Service is the ultimate bill-collection agency. And if you end up owing more money (the unhappy result of most audits), the sooner you pay, the less interest and penalties you'll owe.



Winning your audit
Two people with identical situations can walk into an audit and come out with very different results. The loser can end up owing much more in taxes and have the audit expanded to include other parts of the return. The winner can end up owing less tax money. Here's how to be a winner.


Treat the auditor as a human being. Believe it or not, most auditors are decent people just trying to do their jobs. They are well aware that taxpayers don't like seeing them. But you don't have to bow before them, either — just relax and be yourself. Behave as you would around a boss you like — with respect and congeniality.


Stick to the knitting. You're there to discuss only the sections of your tax return in question. The more you talk about other areas or things that you're doing, the more likely the auditor will probe into other items.


Don't argue when you disagree. State your case. If the auditor wants to disallow a deduction or otherwise increase the tax you owe and you don't agree, state only once why you don't agree. If the auditor won't budge, don't get into a knockdown, drag-out confrontation. The auditor may not want to lose face and is inclined to find additional tax money, which is the auditor's job. Remember that, when necessary, you can plead your case with several layers of people above your auditor. If this method fails and you still feel wronged, you can take your case to Tax Court.


Don't be intimidated. Most auditors are not tax geniuses. The work is stressful — being in a job where people dislike seeing you is not easy. Turnover is quite high. Thus, many auditors are fairly young, just-out-of-school types who majored in something like English, history, or sociology. They may know less about tax and financial matters than you do. The basic IRS tax boot camp that auditors go through doesn’t come close to covering all the technical details and nuances in the tax code. So you may not be at such a disadvantage in your tax knowledge after all, especially if you work with a tax advisor (most tax advisors know more about the tax system than the average IRS auditor).