Like getting struck by lightning or dying in a plane crash, an Internal Revenue Service audit is as terrifying as it is unlikely. The IRS audits fewer than 1% of taxpayers every year. Nonetheless, there is always a remote possibility you’ll receive a notice that your tax return has been selected for examination.
If you’re one of the (un)lucky ones, don’t panic. Take a deep breath and do the following:
Read and follow through on the notice as soon as possible. The IRS has given you information, instructions, and a deadline to respond (usually 30 days after you’ve received the audit notice). Don’t ignore any of this or put it off—or you could be on the hook for money you wouldn’t owe otherwise.
Know what kind of audit you’re in for
Although the typical image of an audit involves an IRS agent showing up at your door and asking to dig through your filing cabinets, this is only one (highly uncommon) kind of audit. In reality, there are three different types of IRS examinations:
- Correspondence audits are the most common and least intensive: they’re done through the mail. Roughly 80% of all audits are correspondence audits.
- Office exams are more serious, and involve a face-to-face meeting with an agent at the IRS office. An office exam typically concludes in a single day.
- Field exams are the rarest and most labor-intensive IRS audits—they’re held at your place of business. This type of audit is performed on location because the agent wants to access to the widest possible range of information. If the IRS wants to perform a field exam, chances are they are looking for a specific document or missing piece of your taxes.
The key to surviving an IRS audit lies in thorough recordkeeping. Make sure you have every document the IRS is asking for—nothing more, nothing less. Not having the documents you need can cost you thousands of dollars during an audit, as those documents may be how you convince the IRS you owe less than they think you do. Track down any missing or incomplete information, make copies (never hand over original documents), put everything in order, and provide it to the agent. According to the IRS, business owners should be saving the following documents:
- gross receipts
- proofs of purchase
- expense documents
- documents that verify your assets
Be ready to argue (politely)
Don’t assume the IRS is infallible or that you’re stuck with an agent’s initial finding. You have the right to challenge an IRS determination. If you feel like the IRS is incorrect about how much you owe, there’s a right way and a wrong way to state your case:
- Be respectful. IRS agents are people—people with stressful, difficult jobs. The more courtesy you show them, the more likely they are to listen to what you have to say.
- Stand up for yourself. The IRS is counting on you feeling nervous and intimidated, and if you don’t speak up and disagree when necessary, you’ll regret it later.
- If you feel like you need more time, ask for it. More often than not, the IRS will grant additional time to those who request it.
- Don’t say or provide more than is absolutely necessary. For many audit questions, a “yes” or “no” will suffice. Information is power—you don’t want to give the agent further cause to look into your records.
Talk to a tax professional
If you receive a letter from the IRS and are unsure what to do next, reach out to your accountant or financial partner. The tax pros at indinero can help you navigate the process as quickly and painlessly as possible.
As rare as they are, audits do happen—and some taxpayers are at audit risk than others. Learn how to minimize your chances of getting audited.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. indinero assumes no liability for actions taken in reliance upon the information contained herein.