What to Do Before, During, and After an IRS Tax Audit
A tax audit can be a nerve-wracking event, but the more prepared you are, the better the outcome is likely to be. (To learn about the basics of IRS tax audits, see our post, What You Need to Know about IRS Tax Audits.) Below are some steps to take before, during, and after an IRS audit to obtain a favorable result.
Before the Audit
You will learn you are being audited when you receive an IRS audit notice in the mail. The audit notice will include a date by which you must schedule an audit appointment, identify those records you must produce for the audit, and provide you with the name and contact information for the auditor assigned to you. It is important that you contact the auditor and schedule the audit appointment before the deadline.
Upon receiving notice of an IRS tax audit, preparation should begin. Usually, that means gathering documentation that substantiates the income and deductions on your return. It is much easier to gather this documentation if your business and financial records are organized and categorized in advance, but you may be able to request an extension of the audit deadline if you need additional time to gather or re-create documentation for the audit.
Gather all of the documents requested in the audit notice and any documentation that supports the returns for the years requested. Be prepared to explain the reasons for any missing records. Depending upon whether the audit is of your business or personal return, documents you should pull together typically include:
- Bank statements and credit card records;
- Canceled checks;
- Receipts for charitable donations, business expenses and items sold at a gain;
- Electronic records;
- Calendars, appointment logs or other appointment documentation;
- Payroll information;
- Automobile records;
- Travel and entertainment records, including mileage records;
- W-2 forms;
- 1099 forms;
- Articles of incorporation;
- Minute books; and
- Loan records
In addition to gathering documentation, you should also contact your accountant, a tax advisor, and /or a tax attorney with experience in audits. In some cases, you may want to have the professional attend and represent you at the audit, especially if: 1) you do not have backup documentation for the return(s) involved in the audit; 2) you are subject to a field audit; 3) you have a large, potential tax liability; and/or 4) there is any indication that the IRS believes there is fraud involved.
During the Audit
During the audit, you should provide all documentation requested by the IRS. The primary goal during an audit is to show the auditor that you filed your return properly, reported all of your income, took appropriate deductions, and paid the appropriate amount of taxes. It is not advisable to volunteer information or documents that the auditor has not requested—providing extra information may open additional avenues of inquiry that the auditor was not originally intending to explore, potentially resulting in additional fines and/or penalties. Finally, be prepared to answer all questions posed by the auditor truthfully and succinctly.
After the Audit
After the audit, you will receive an examination report from the IRS auditor indicating the amount of the interest and penalties you owe, if any. You may sign the report and pay what you owe, or, if you disagree with the report, you have 30 days to appeal it. Keep in mind, however, that the cost of the appeal may exceed what you owe, so think carefully and speak with an attorney before deciding to appeal.
During and after the appeal period, a lawyer that specializes in tax matters can help you negotiate with the IRS to lower your tax liability. This is called an offer in compromise, which is an agreement between the taxpayer and the IRS allowing the taxpayer to pay less than the full amount owed. The settlement can be negotiated to be paid as a lump sum or in installments.
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