"You are being audited ..." Words that can strike fear into the hearts of
the bravest, most stable and level-headed adults. A federal tax audit is a
fearful thing to most of us - and with reason. Instinctively, we know an
audit will take time, create frustration, and cost us money. It will make
even the most intelligent and honest of us feel inadequate, dumber than a
doorknob, and criminal, as well.
Why? Because we know we don't really understand all the rules and
regulations of filing our income tax. We know that common sense and
intelligence are no guarantee of doing the darn things to the satisfaction
of the IRS department. And, we've heard all the horror stories about
others' audit experiences.
So, is it as bad as all that? Well, it CAN be bad, but there are things
you can do to make the audit a less painful experience. It will, no doubt,
still be a fearful and unpleasant thing, but not so bad as you think.
Once you have been notified of the impending audit (no, we didn't say
impending doom), you will have to make an effort to keep a sense of humor
about it. Because even if takes some effort, you may as well look at it
with a sense of humor. Maintaining a sense of humor will help keep you
sane through the ordeal - - - well, process.
OK. You have received your audit notice and we will assume you aren't
laughing. What should you do?
First, you will want to decide if this is something you want to face on
your own. We advise that you let your accountant or tax preparer in on the
audit. In fact, it is best if you let him take care of all the direct
communication with the auditor. He is in a better position to be objective
about the whole thing (he isn't numb with fear). And it is important to be
objective and unemotional with the auditor. Your tax preparer knows what
the auditor wants to hear and will be able to discuss any problems and
answer the questions more intelligently than you could (he isn't speechless
with terror). If your tax preparer wants to make time to consider the tax
implications of certain information, he can stall for time with a simple,
"I'll have to check that with my client." Besides he is more likely to
understand the jargon and what the auditor wants.
You will have to gather up all your receipts and other documents and make
sure they are in order. Be sure they are orderly and understandable. Your
tax preparer will likely have to find things for the auditor. It is also a
good idea to go through the records and recalculate. Check the
mathematics. Check transfers of figures from one record to another. Check
your deductions, in particular. If you find you made a gross error when
your reported, let your tax preparer know. He will take care of letting
the auditor know.
But give him only your receipts for each item that is being checked - with
totals. Don't volunteer anything that hasn't been requested! You do not
have to give him cancelled checks, expense logs, or other backup material.
If the auditor decides he needs those, he can get them at a later visit.
If you decide you want to handle this thing on your own, the same thing
goes for what you say. Give him only the minimum - answer with just a yes
or no. Don't say anything you don't have to. Don't volunteer anything or
defend your answers unless directly questioned about your reasoning. But
if you go alone, you had better be prepared to defend your every entry on
your return. If you have accurate and complete records, the audit will be
easier - it will be much easier to defend your entries. Your tax preparer
will want those records to be accurate and complete, too, if you have
wisely chosen to have him represent you at the audit.
A great deal depends upon what shape your records are in. An audit often
takes place long after you filed - it can be years after - so if your
records aren't clear it will be pretty difficult to defend your entries.
An audit can consist of one short visit or several visits over an extended
length of time. It depends upon the thoroughness of the auditor you have
been blessed with and the complexity of the return you filed. The auditor
will probably operate in a less specific manner than you would like -
you'll probably have to suffer a time of suspense, because the auditor does
not have to give you any specific results right away. But you will be
notified of those, too, sooner or later.
And what will be the result? That will depend on how accurately your
return was completed, how well you handled the audit interviews, and your
auditor's opinions about what are allowable deductions (and, of course,
whether he and his wife are getting along). And that is why we become so
frustrated - some of these matters we have absolutely no control over.
But whatever the result, be prepared to pay. It will, no doubt, cost you
money. Sometimes they decide that you did a good job of deciding what to
put on the form, so you don't owe them any money. Sometimes they will
disallow a deduction or change a depreciation schedule or something so you
do owe them some money. Whatever the auditor decides, you will more than
likely end up owing your tax preparer for his services. But cheer up! You
probably won't end up in jail - unless, of course, you have been
deliberately defrauding the government. But even then, a check can usually
So an audit isn't the end of the world. But it is tense and frustrating
and most of us would like to avoid it.
What are your chances of being audited and how can you reduce them?
Well, every year more than two million "invitations" are sent out to
reluctant guest (not many of these invitations are declined, by the way).
Most of the time, you are chosen for an audit by a computer program. The
computer scans returns looking for items that may indicate an error. Large
deductions in comparison to your income is one. Some are randomly selected
by the computer that have no questionable items.
Some types of deductions that auditors examine closely are those that you
are not likely to have adequate documentation for. If you have had losses
due to vandalism, accidents, floods, fires, storms, and the like, you may
be picked for an audit.
Since child care is often paid in cash. If you have a large claim for
child-care expenses, be sure to document it carefully. Get receipts.
Charitable contributions are carefully checked. For your protection, always ask for receipts to back your claims.
Also, handle auto and entertainment deductions carefully.
If your return has been examined in one of the two previous years for the
same items they are questioning this year and that audit resulted in no
extra payment, you can call the IRS. The audit will likely be suspended.
Once the computer kicks out your return for audit, will you automatically
be audited? No. Your return is reviewed by IRS employees, and they make
the final decision on whether or not to audit your return.
You can stop the process right there. In fact, many returns that have been
kicked out are never audited. Some people never even know that their
return was chosen by the IRS computer for an audit!
So, what can you do to stop the IRS from auditing you? Prepare your return
correctly. If it is apparent that there is no error on it, the IRS
employee who reviews it will overturn the computer's decision and you will
not be audited. If you have unusual or unusually large deductions,
include proof of the deductions with your return- receipts from charities,
receipts for other deductions - so that the reviewing agent will know that
you have not made an error and to convince him that there is no need for
examining any further. (When you include receipts or proof with your
return, always be sure to keep a copy for your records.) He will overturn
the audit - and you will probably never know that the IRS computer picked